(Releads with comments from c.bank Vice-Governor Singer)
By Jana Mlcochova and Martin Dokoupil
PRAGUE, July 8 (Reuters) - The strong Czech crown currency
may reduce domestic demand significantly and slash inflation to
below the central bank's new target, effective from 2010,
central bank Vice-Governor Miroslav Singer said on Tuesday.
The statement comes in a sharp contrast to remarks by fellow
Vice-Governor Mojmir Hampl, who said earlier on Tuesday that the
unit's appreciation may not be enough to tame inflation as he
advocated a hike in borrowing costs.
The crown hit a record high of 23.455 per euro <EURCZK=>
late on Monday. It has jumped 18 percent over the past year,
driven by strong economic growth and exports which have made the
unit a safe haven in volatile global markets.
"The current exceptionally strong exchange rate of the crown
... could lead to a dramatic drop in domestic demand and to a
corresponding marked drop of inflation, even below the levels of
the new target," Singer wrote on Web site www.ekonom.ihned.cz.
"We will know more when discussing the new forecast at the
beginning of August," said Singer who voted for stable rates in
the past three meetings.
The crown strength has been the main reason for the central
bank to keep the main two-week repo rate flat at 3.75 percent on
June 26 since the last in a series of hikes in February.
The rate is half a percentage point below the European
Central Bank's (ECB) benchmark, which stands at 4.25 percent
since last week.
Singer said in a headline of his article that no change in
interest rates was out of question.
He said a rate cut would be possible as the strong crown
tames price pressures and could squeeze inflation below the
bank's new 2 percent inflation target, valid from 2010.
"If (the bank) decides that the current unprecedented
appreciation of the crown could lead to undershooting of the
target on the horizon of the (bank's) inflation projection, it
does not mean that it cannot interfere and prevent a massive
drop in demand causing a decline in prices below inflation
target by easing its monetary conditions," Singer said.
The market has been mostly expecting either one more
interest rate hike or flat rates in the coming months.
Annual inflation eased to 6.7 percent, the lowest reading
since December last year, data showed earlier on Tuesday,
surprising the market [].
The central bank said on Tuesday the crown was beginning to
exert a strong anti-inflationary effect but price growth may
once again grow over 7 percent in the summer and autumn before
falling toward the bank's current 3 percent target in 2009.
But daily Hospodarske Noviny quoted Hampl, the most hawkish
member of the central bank's seven-member board, as saying that
he feared a possible rise in inflationary expectations that have
been long anchored at low levels.
"A mix of rising pro-inflationary pressures coming from the
world and winding-up extraordinary growth in our economy make me
more cautious," said Hampl, who has been a lone vote for a 25
basis point rate hike since February.
(Editing by Ron Askew)
