By Petra Vodstrcilova
PRAGUE, July 10 (Reuters) - The Czech central bank is likely
to leave interest rates unchanged at its August 7 policy meeting
but a move in either direction is possible by the end of the
year, central bank board member Robert Holman said.
Holman said in an interview with Reuters he was concerned by
the crown currency's sharp gains -- 18 percent versus the euro
over the past year -- which would hurt the central European
economy in the short run.
The Czech central bank has been squeezed this year between
an inflation spike and the strong crown, and has kept its hands
off interest rates since a series of hikes that brought the repo
rate <CZCBIR=> to 3.75 percent in February.
Poland, Romania and Hungary have also tightened policy to
combat surging inflation, but record high currencies around the
region have dampened expectations of further hikes.
"If I were to give my opinion on the August meeting, I do
not see much probability that there would be raising or lowering
of interest rates," said Holman, who has voted for stable rates
at all meetings so far this year, and was one of two
policymakers who opposed the February rise.
"But concerning other meetings until the year-end, I cannot
rule out anything."
The Czech central bank has insisted annual inflation will
fall back sharply next year to its target band of 3 percent,
plus/minus 1 percentage point, from nine-year highs of 7.5
percent in January and 6.7 percent in June.
Interbank interest rate forwards (FRAs) imply rates going up
in the coming months <CZK1X4F=> <CZK3X6F=>.
Central bank Vice-Governor Miroslav Singer said on Tuesday
that the strong currency may have such an impact on domestic
demand that inflation may fall below the bank's new 2 percent
target after it takes effect in 2010.
But another vice-governor, Mojmir Hampl, said the crown may
not be strong enough to tame inflation pressure [].
"The level of uncertainty is such we are rather waiting for
more figures, further information, than making a wrong decision,
raising rates and then lowering them again," said Holman.
Czech economic growth slowed from 6.8 percent in early 2007
to 5.3 percent in the first quarter this year and is expected to
decelerate further due to cyclical reasons as well as weakening
demand abroad and the strong currency.
But the economy is still seen as a safe haven amid the
volatility on world markets, attracting investors who pushed the
crown to new all-time highs of 23.417 per euro on Tuesday. The
crown is sought after despite the official interest rate being
50 basis points below the euro zone's.
Holman said the safe haven status had an impact on the
currency, as well as exporters' hedging and the economy's
overall trend of convergence with richer western Europe.
"I believe today's foreign exchange rate level does not
correspond to fundamentals of the Czech economy, this is a
certain overshooting," he said, adding a correction could be
expected.
"I think the impulse will come from global financial
markets, when the situation calms down. We do not know when that
will be."
He said the crown would have an impact on exporters in the
short run, because they cannot offset such a fast appreciation.
But in the longer term, the economy will adjust with
production moving into higher added-value sectors, he said.
Holman said the strong crown would help squeeze inflation
below 4 percent in the first quarter next year.
"Maybe I am more optimistic than my colleagues, but at this
time the full impact of the exchange rate shock will show,
pushing inflation down," he said.
