Czech rates’ trajectory after some time to depend on crown’s development

The development of interest rates going forward, after the fx cap end, would depend on how the crown’s exchange rate will develop, Czech central bank, CNB, deputy Governor Mojmir Hampl has said in an interview with local Lidove Noviny daily on Saturday. Still, he noted, there would be some time after the end of the fx commitment before the central bank engages with increasing interest rates, adding that such a development is also in line with the CNB’s recent developments. He pointed out that higher interest rates would indirectly affect the wage growth as the costs of companies for funding themselves and investments will increase, but underlined that such a consideration would be true only in case of subdued development on foreign markets. Hampl noted that since November 2013 the CNB has been trying to adapt the monetary conditions to the state and the development of the real economy and pointed out that for some time of late (before the fx cap end) it seemed that the monetary conditions were too loose and inadequate to the state of the real economy and that was the reason for the central bank to terminate its fx commitment in order to prevent the economy from falling into trouble. He also said that the role of the central bank is by pursuing its objective of price stability to strive at maximally suppressing fluctuations around the economy’s potential, adding that increasing the production potential of the economy was not among the CNB’s tasks, but up to policymakers. Hampl admitted that the Czech economy might have exhausted its growth potential given that the only 2% GDP growth amid shrinking labor, adding that this was a global trend and that it currently seemed that there was nowhere to take labor force from.

The CNB terminated its fx commitment on Apr 6 with immediate effect assessing the risks to the inflation forecast on the upside, that the fx cap on the crown and maintaining it was no longer consistent with the current macroeconomic situation and is unlikely to markedly raise sustainability of inflation target fulfilment, while keeping it may increase the risks of macroeconomic imbalances. Now that the crown has been left to float in line with demand and supply, we believe that the CNB is likely to wait with monetary tightening via interest rates for a while until the market absorbs the shock and the crown stabilizes at a new equilibrium level that reflects economic fundamentals. For the time being the crown has been fluctuating quite moderately and definitely much more moderately than expected by the market with the highest appreciation being up to 2%. Most analysts expect the crown to firm by some 5% in next twelve months and stabilize at a level of some EUR/CZK 26, close to the pre-intervention levels, but the central bank sees such consideration unjustified as it believes that the weaker crown level has already passed through the price level, wages and other real economy variables and the previous fx cap at EUR/CZK 27 was close to the new equilibrium. Still, Governor Jiri Rusnok has admitted that higher volatility is yet to come following the reversal of the huge crown positions of investors that piled into crown assets betting on Swiss-like scenario of sharp crown’s firming after the fx cap end.

In the meantime, CNB Governor Rusnok said in an interview with local Hospodarske Noviny on Monday that it would be supportive to the economy if companies can more easily employ foreigners as they definitely face problems of finding qualified employees on the local labor market. He assessed the fact that the country has been closed for imports of workers as a fatal mistake, criticizing trade unions and state administration for rather complicating the process of bringing in foreign workers and opening to a greater extent the country’s labor market. Rusnok noted that bringing in of foreign workers, e.g. from Ukraine would contribute to GDP growth few percentage points.

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