RPT-ANALYSIS-Czech c.bankers may reveal forward path for rates

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By Marek Petrus

The Czech central bank, a pioneer of inflation targeting in post-Communist central Europe and a regional leader in transparency, may calm market volatility by giving more insight into its thinking on interest rates.

It is considering joining the Reserve Bank of New Zealand, Norway's Norges Bank and Sweden's Riksbank in revealing its outlook for interest rates as a signal on future policy, Czech National Bank (CNB) officials say.

"In my view, such a move will make the market's yield curve less volatile within the three months between quarterly forecasts," said Daniel Kozel, portfolio manager at PPF Asset Management.

In 2002 the CNB was the first among its regional peers to switch from assuming constant interest rates to making inflation forecasts that imply rates move one way or the other to bring inflation to a pre-set target.

Policymakers are planning a two-day meeting in March to examine ways of fine tuning communication with markets, but some of them told Reuters the CNB would be careful in announcing any changes because they do not want to backtrack on any decisions.

The newest push for greater openness appears to be led by Mojmir Hampl and Vladimir Tomsik, economists in their early 30s who joined the seven-strong policy board in December last year.

The two are lobbying strongly for making the rate path public to boost transparency and help steer market expectations, and they could make a difference as consensus on the board before their appointment leant towards keeping markets guessing.

So far, the CNB has signalled only in which direction and at what pace it sees interest rates moving over the forecast horizon of up to 18 months.

MATURE ENOUGH

As with any central bank, the CNB is in a quandary. It is reluctant to commit itself to a course of action, yet markets want guidance to help them form a view of possible future moves and price long-term interest rates.

"Markets seem to be mature enough, and analysts and other people watching the central bank experienced enough, to understand that such a forward rate path is only a forecast, and not a commitment," said economist Oldrich Dedek, who served as CNB Vice-Governor until early 2005 and now teaches at Charles University in Prague.

The most logical way forward for the CNB would be to publish quarterly averages, or a fan chart, for the 3-month Prague Interbank Offered Rate which serves as the proxy for its policy rate in its forecasting model.

But some economists noted the risk of the CNB smoothing out the rate path implicit in its inflation projections, and thus manipulating markets to avoid fuelling too much volatility.

SECRET VOTING

The adoption of inflation targeting in 1997 has led the CNB over the years to increase transparency and improve communication with the public and markets, which is viewed as key to a successful monetary policy.

A 2003 study of 19 inflation-targeting central banks found the CNB to be the fifth most predictable behind the Banks of England and Korea, and the Reserve Banks of Australia and New Zealand.

But Tomsik and Hampl both want the CNB to do more.

Tomsik told Reuters in an interview earlier this month that inflation forecasts, including the implicit rate path, should be made by expert staff and more independently of policymakers, allowing each of them to talk more freely about future policy.

Both he and Hampl want the CNB to publish a roll call of votes on interest rate changes, instead of the overall count of votes cast for each proposal as is the CNB's current practice.

"In my view, it would be helpful to have each bank board member bear his own, personal responsibility for monetary decisions," Hampl told Reuters.

Many market analysts also want the CNB to follow the Bank of England, the U.S. Federal Reserve and central banks of neighbouring Poland and Hungary in publishing voting records.

"What appears to be a seemingly collective and secret voting does not look very transparent to me," said Petr Dufek of CSOB.

But some CNB policymakers, possibly including Governor Zdenek Tuma, may be put off by the experience of Bank of England which appeared to suffer a blow to its credibility after Governor Mervyn King was outvoted by the majority in 2005. ((Editing by David Stamp; Reuters Messaging: rm://marek.petrus.reuters.com@reuters.net; e-mail: prague.newsroom@reuters.com or marek.petrus@reuters.com; Tel: +420 224 190 477))

Keywords: CZECH CENTRALBANK/

[PRAGUE/Reuters/Finance.cz]