PRAGUE (Reuters) - There are no inflationary pressures in the Czech economy and a further relaxation of monetary conditions is needed, a central bank board member was quoted as saying.
The Czech central bank (CNB) cut borrowing costs to near zero last year to prop up demand in a contracting economy and said it would intervene to weaken the crown if it needed to ease monetary conditions further.
Inflation, which the bank targets at 2 percent with a tolerance band of 1 percentage point either side, was 1.4 percent in July, remaining below 2 percent for a seventh month in a row.
“Undershooting the inflation target can be a problem,” board member Lubomir Lizal said in remarks given to newspaper E15 to be published on Monday.
“There are no inflationary pressures in the economy. While (our) mandate is to have low stable inflation... There is a need to loosen monetary conditions further,” E15 quoted Lizal as saying.
Policymakers edged closer to intervening to weaken the crown at their August meeting, with some arguing strongly for such a move, minutes from the session showed.
But the seven members of the bank’s policymaking panel continued to be split over when to launch the crown sales.
The minutes do not reveal names of individual central bankers when describing what was said in the debate but market participants believe Lizal is part of the dovish camp calling for the immediate launch of intervention.
The crown traded at 25.726 against the euro on Sunday. The bank’s forecast sees the average rate in the third quarter at 25.8 per euro.
Lizal said the forecast assumed lower interest rates than those currently, which meant the crown was over-valued now.
If the bank decided to intervene, it would buy a mix of currencies, not only euros, Lizal said. But he added the most significant currency pair on the market was the euro versus the crown, “and that is necessary to respect”.
The central European export-reliant economy emerged from a record-long recession in the second quarter, after six quarterly contractions caused partly by government austerity and partly by weakening demand for its industrial goods from the euro zone, which was also going through a downturn.
It grew by 0.7 percent quarter on quarter in the April-June period.
“I would rather perceive it as a good signal, not an unambiguous confirmation that the situation has turned around,” Lizal commented on the data.
Reporting by Jana Mlcochova; editing by David Evans