PRAGUE, Oct 23 (Reuters) - The Czech National Bank can keep monetary policy on hold for the time being and let fiscal policy be the main defence against a weakening economy amid the second wave of the coronavirus pandemic, central banker Ales Michl said in an interview.
The government has brought back some strict measures like closing shops and restaurants to fight the novel coronavirus outbreak.
Michl told Reuters the economic drop in the fourth quarter would be milder than a 10.9% year-on-year contraction recorded in the second quarter, the first wave of coronavirus.
The central bank has held steady on policy since slashing its key interest rate by 200 basis points to 0.25% in three steps when the initial wave of the pandemic hit.
Michl said the central bank’s main role was to stabilise the situation. “For me, it’s wait and see now,” Michl said in an interview over video stream on Friday.
“We have to watch over the market, so that it is not stressed, spreads don’t widen ... It is also important to shape expectations, (meaning) long-term interest rates to stay low.”
“Expect the fiscal side to be the main player,” he said.
The Czech Republic is facing Europe’s highest per-capita infection rate for COVID-19 cases in recent weeks.
Industry, though, is running, unlike in the spring, when major factories idled.
Amid the spike, the crown has weakened and markets have speculated on chances of a rate cut or unconventional policy tools.
Michl said he would never vote for negative interest rates or exchange rate interventions.
“(The crown) is market-driven for me, so don’t expect any exchange-rate commitment or some tampering with the exchange rate from me,” Michl said.
He also said he expected fiscal impulses should be even bigger in 2021.
The government has sought to aid affected businesses again as part of a planned record budget deficit of 500 billion crowns ($21.79 billion) this year. It wants an income tax cut as part of the 2021 budget.
The central bank could also help by an extraordinary dividend, Michl said, reiterating calls he has made before but that the bank board has not backed.
“If I see that inflation is falling towards zero in the next year or the year after, and I need expansion, then the only role for the central bank is an extraordinary dividend paid to the state budget, which (the state) can do whatever with, some fiscal impulse for instance,” Michl said.
$1 = 22.9480 Czech crowns Reporting by Robert Muller, editing by Larry King
Our Standards: The Thomson Reuters Trust Principles.