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INTERVIEW-Czech rates may not rise if crown keeps gaining, central banker says


Reuters

* Crown so far, domestic factors favour hike in Q3
    * But continued faster appreciation could delay move
    * Central bank also watching ECB
    * Not planning to use interest rates to slow mortgages

    By Jan LopatkaPRAGUE, June 20 (Reuters) - The Czech central bank may put
off raising interest rates to beyond the third quarter if the
crown keeps strengthening at the pace seen in recent weeks, bank
board member Marek Mora said.
    The economy is healthy and the bank has room to tighten
policy in the third quarter, in line with its forecasts,
although slow inflation in the euro zone remains an issue, Mora
said.
    But further substantial gains by the crown could compensate
for that and push rate increases into the future, Mora, who
joined the board in February, told Reuters in an interview on
Monday.
    In April, the bank dropped its cap on the value of the
crown, a tool for keeping monetary conditions relaxed, after
more than three years. That opened the door to a rise in
interest rates, which would be the first in central Europe in
the current economic cycle.
    "When I take into account overall the crown's firming since
the exchange rate cap, a rate increase could come in the third
quarter," Mora said.
    "But when I look at the pace that has been happening in the
past weeks and extrapolate it into the future, I would see it
later."
    The bank forecasts a rise in the third quarter. Inflation
has accelerated to 2.4 percent in May, above a 2.0 percent
target.
    The main repo rate has stood at 0.05 percent since November
2012. Markets are pricing in an increase in the first half next
year.
    The crown at first rose slowly from its former cap - 27 to
the euro - partly because of long crown positions. It had
settled around 26.50 in May but then jumped to 26.115 last week,
3.4 percent stronger than the cap.
    A stronger currency in effect tightens policy by making
imports cheaper and exports more expensive.
    Mora, an economist who was previously director at the EU
Council focused on budget and taxes, said domestic economic
factors have been broadly in line with the central bank's May
quarterly forecast.
    He said the bank also must keep an eye on the European
Central Bank's asset-buying programme continuing until the end
of this year though it is not clear what will follow.
    "A potential delay in the departure from quantitative easing
... would also affect our interest rate increases," he said.
    "If we raise rates, we may do it even under a situation when
the ECB still is in an unconventional regime. We would do it
very slowly and sensitively, in order to avoid capital inflows
and the crown firming even more," he said.

    RATES NOT FOR FINANCIAL STABILITY
    The bank last week ordered banks to raise their
counter-cyclical capital buffers because of fast credit growth.
[nL8N1JA1HH]
    It has also sought powers to regulate households' mortgage
exposure. But the law is stuck in parliament and may not be on
the agenda before an October election [nL8N1J9139].
    This has led to debate over whether the bank may eventually
resort to using the counter-cyclical buffer or even interest
rates to cool the housing market.
    Mora said the bank would seek to use targeted measures to
regulate mortgages. He said using the counter-cyclical buffer
could not be excluded if the bank lacks other tools, but
interest rates would remain a means of coping with inflation.
   "I do not believe that we would leave inflation targetting
and start using interest rates for financial stability. That
will certainly not happen."

 (Editing by Larry King)
 ((jan.lopatka@thomsonreuters.com; +420224190474; Reuters
Messaging: jan.lopatka.thomsonreuters.com@reuters.net))

Keywords: CZECH CENBANK/ (INTERVIEW)



This article appears in: Stocks , World Markets , Banking and Loans , Politics


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