The longest-ever Czech recession continues unabated as fresh data Monday showed export growth weakening and industrial output contracting, but still hasn’t tipped the balance of opinion towards central bank intervention to weaken the koruna.
“The monetary policy board has seven members and only three members want immediate action. It’s going to be difficult to convince the fourth. Interventions are costly for the bank and the outlook is very uncertain,” said economist Vladimír Pikora at Nextfinance in Prague.
The indicators Monday showed that imports and exports are falling even though the country enjoys a foreign trade surplus, suggesting that domestic and foreign demand are weak.
This comes as inflation decreased 0.4 percentage point to 1.3% in May from April, well below the central bank’s 2% target.
The central bank, which last year cut its benchmark interest rate to 0.05%, believes that overall risks to the economy are disinflationary and “tilted to a need for easier monetary conditions,” according to minutes from the central bank’s June 27 policy meeting, also released Monday.
The central bank said the data strengthen the disinflationary trend that it noted six weeks ago.
“The board members also agreed that the need to further ease the monetary conditions had increased compared to the situation” in mid-May, the minutes said.
But launching an intervention is still a hotly contested topic on the seven-member monetary policy board.
“Several board members spoke in favor of immediately commencing foreign exchange interventions. However, it was also said that the tendency to undershoot the inflation target was only short term in nature and that a necessary condition for commencing interventions was a risk of sustained deflation, which was not materialising,” the minutes said.
Elements that make a potential intervention more likely include the Czech Republic’s current political uncertainty, which may prevent fiscal policy from easing as was expected, so “monetary policy would have to take this into account” the central bank said.
It said the scope of potential interventions was “unlimited,” adding that a weaker koruna would impact the economy more quickly than interest rate changes.
There are several factors working against an intervention, namely the koruna is trading against the euro at a weaker level than the central bank forecasts.
“It’s entirely possible that the remainder of the [monetary policy] board is quietly betting that euro-zone developments will work on behalf of the Czech central bank and market developments themselves will weaken the koruna,” Nextfinance’s Mr. Pikora said.
Additionally, the tendency to undershoot the inflation target “was only short term in nature and that a necessary condition for commencing interventions was a risk of sustained deflation, which was not materialising,” the minutes said.
The central bank also noted that the current improvement in German consumer confidence offered hope that a turnaround in external demand for Czech goods might materialise.
Citfin analyst Jiri Simek said Monday’s economic indicators aren’t great but can be seen as part of a larger picture over which local monetary policy has little influence.
Industrial output declined in May largely due to the country’s mining sector posting an annual production decrease of more than 25% in the month, but that was mainly because of record-low coal prices.
An annual decline in automobile sales in May followed a surge the previous month.
“I wouldn’t view these numbers so tragically. For the whole year, industrial output growth should be about zero, it’s not going to have a major impact on the economy,” Mr. Simek said.
By: Sean Carney
Posted: July 8, 2013, 3:52 pm
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