October 15, 2019 / 11:23 AM / a month ago

UPDATE 1-Czech policy outlook exposed to risk of weakening growth abroad- c.banker

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PRAGUE, Oct 15 (Reuters) - Government spending has helped boost the Czech economy, but there are concerns that possible further weakening in external markets could hinder growth, central bank board member Tomas Holub said on Tuesday.

The Czech central bank is one of the rare monetary policy boards in Europe that has kept an interest rate hike debate alive while others have shifted towards easing measures due to prospects of slowing growth in global trade.

Holub, speaking at an economic debate, said concerns of possible further cuts to external growth forecasts posed a downward risk to the central bank’s inflation outlook.

He said worsening German economic data showed there would be spillover into the Czech economy.

“The Czech economy has a very dual character right now. Whatever is tied to foreign demand is stagnating or growing in the low single digits,” he said.

Holub said government spending boosted economic growth by about half a percentage point this year. The bank expects the economy to grow by 2.6% in 2019 and 2.9% in 2020, according to its last outlook published in August. A regular update is due in November.

Holub said there had not been any major deviations from the latest outlook, and he did not see a recession coming.

The performance of the crown currency, which failed to meet central bank expectations that it would firm this year, would be a big factor in any decision on whether to the key two-week repo rate from 2.00%.

Holub said the crown seemed settled around its current level against the euro. It was trading at 25.82 per euro on Tuesday. The central bank’s outlook had predicted an average exchange rate of 25.4 in the third quarter and 25.2 in the fourth.

Holub said the central bank did not have to follow European Central Bank’s policy steps, given that the crown’s exchange rate did not reflect the interest rate differential, which was at its highest in years.

He said ECB’s easing could force the Czech central bank’s hand - but that would happen if it led to weakening of the crown, which is an important inflation factor in the widely open economy.

The bank discussed whether to hike interest rates at its last meeting in September. But it voted 5-2 to maintain stable borrowing costs and said it was likely to continue the debate at its November meeting. (Reporting by Jan Lopatka, writing by Jason Hovet; Editing by Simon Cameron-Moore)

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