The Czech central bank sees anti-inflationary pressure from wages but there is no need for urgent debate on altering the set of policy instruments it uses as the economic recovery is well underway, central bank Governor Miroslav Singer said. Singer told Reuters in an interview that the bank's board discussed alternative policy tools including negative interest rates and others at its last meeting. But he said this was inspired by the experience of other central banks with such instruments rather than by any urgent need to deploy them at home.
The Czech National Bank weakened the crown by about 7 percent in late 2013. The market has since respected its pledge to keep the currency on the weak side of 27 per euro as a policy-loosening tool after cutting its main rate to 0.05 percent in November 2012.
It has since repeatedly delayed its expected exit from this policy, and now does not expect it to end before the second half of 2016 as inflation remains close to zero despite the bank's forecast for economic growth to pick up to 2.6 percent this year.
A drop in oil prices, lower wage growth and the mention of alternative tools in the minutes of the bank's March 26 meeting sparked speculation in the market that it may add negative rates to its list of deployed policy tools.
But Singer said there was no urgent need for new instruments. "All in all we are talking about small deviations here (versus the forecast). The need for urgency in any debate is not overwhelming," he said in an interview on Monday afternoon. "Spring is in the air. Economies globally are accelerating, the effect of oil prices will be phased out... It does not seem there is any terrible drama under way. No drama."
The bank will discuss policy on May 7 and will also look at a quarterly update of its inflation and economic forecasts. Singer said the labour market has improved but that has not made up for the lower growth in wages. There is still a lot of room for improvement in the labour market when looking at vacancies and the jobless rate - something he expects will be pointed out in the updated economic forecasts next week.
He said the bank, having acted earlier then the European Central Bank to loosen policy, could now afford to sit out the primary impacts of shocks such as the plunge in oil prices. Singer said negative rates were debated in the context of the experience of other central banks as well as other actions such as taking over some private credit risk, as seen in Hungary, or even printing "helicopter money" to revive inflation. But no formal proposal to use other tools was made at the March meeting, he said.
Asked if the state of the Czech economy or the experience of others had led to the debate about negative rates, he said it took place: "because there is longer experience with them. Our situation seems to be very orderly." Commenting on any need to alter policy, Singer pointed to the conclusions of the last meeting, which said there was a higher probability than before that the bank would move the exchange rate floor to a weaker level.
"At this point we are not doing anything, but we are saying what we had said before, that wages are a bit below (forecast) so the reading of risks is of course anti-inflationary and the probability of action has risen." "We have the statement here that clearly said that in case there is a need to do something demanded by a dramatic development, whose probability has somehow increased, the exchange rate, at a given level of knowledge, is the first tool that we should be using."
On exiting the exchange rate peg policy, Singer said the bank would not allow a sharp appreciation of the crown once the peg is dropped but it was open as to how this would be achieved. "I am not saying (exit) at once, you can opt for some kind of a tunnel, some crawling or widening interval... We are not there yet. The aim will be to avoid a sharp exchange rate movement, we have said that many times. But which concrete steps to take to prevent appreciation?"
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