Jana Mlcochova (Reuters, 12 December 2011)
The Czech crown currency's recent weakening is "doing the job" for the country's central bank by relaxing monetary conditions at a time when downside risks to inflation dominate the economic outlook, central bank Vice Governor Vladimir Tomsik said.
The bank kept the key two-week repo rate at record low 0.75 percent at its last meeting on November 3 at which Tomsik cast a lone vote for a cut.
In remarks cleared for publication on Monday, he said that while most disinflationary risks he saw when he voted for the cut persisted and some even intensified, the recent weakening of the crown currency was a new element in the overall picture.
"From my point of view, there has been one major shift (since the last meeting)," he said. "The index of monetary conditions has changed significantly from the point of view of the crown's weakening."
The crown weakness in the fourth quarter was in part due to an elevated global flight from risk and Governor Miroslav Singer has said the Czech Republic's close trade links with the euro zone could have also been behind the drop.
The export-driven central European economy dipped by 0.1 percent in the third quarter from the previous three months, its first contraction after eight quarters of growth, as a slowdown at its euro zone trading partners filtered through faster than expected.
Domestic demand has also been tamed by government austerity.
"I can see no demand-driven pro-inflationary impulses, while I can clearly see that monetary conditions are being relaxed via the exchange rate. Therefore the crown is doing the job for us," Tomsik said.
The Czech currency, which for many months resisted a sell-off stemming from the euro zone's festering debt crisis, lost 1.6 percent last month, hitting an 18-month low of 26.115 on November 25.
It has recovered some of the losses since then trading at 25.455 per euro on Monday, but it was not enough to help make the fourth quarter average rate match the bank's forecast, which Tomsik pointed out.
The bank predicted the average rate in the fourth quarter at 24.8 per euro. The average rate since the start of October stands at 25.188 per euro, according to Reuters data.
"I consider the deviation of the current average (exchange rate) from the forecast substantial, however not alarming," Tomsik said.
The Czech bank, unlike some others, tends to look at the currency rate, and its impact on inflation and thus monetary policy, from a perspective of months rather than daily changes.
Tomsik said he continued to see room for the crown's appreciation in the long term, given by the country's convergence with richer West European countries, favourable development of external balance, and a very low risk premium on Czech assets.
DISINFLATIONARY RISKS BUILDING
Both European and domestic economic outlooks are deteriorating and there is a large uncertainty regarding the future, Tomsik said.
New European Union bank regulation rules requiring that banks hold larger capital buffers of top quality assets will cause deleveraging, which was another anti-inflationary element, he said.
"The current measures prepared in the European Union will clearly lead to deleveraging. Banks must cope with many new regulatory changes that concern not only increasing capital buffers but, and that's substantial, also the quality of capital."
Czech banks in general are well capitalised and have low loans to deposit ratios -- the sector average is 73 percent -- which means they have room to keep lending, however some smaller players may be forced to shrink their balance sheets.
Tomsik also pointed to global commodity prices, which he said were likely to stop growing as demand in Europe slumps amid slowing growth, meaning one less upward risk to price growth.
