October 8, 2014 / 12:51 PM / in 4 years

Fragile Czech recovery will not alter weak crown policy: central banker

OSTRAVA Czech Republic (Reuters) - The Czech Republic’s economic recovery remains fragile due largely to uncertainties in the euro zone but nothing has happened so far to make the central bank change its policy of keeping the crown weak, a bank board member said on Wednesday.

Czech Republic's outgoing Prime Minister Jiri Rusnok speaks during an interview with Reuters at the government headquarters in Prague January 24, 2014. REUTERS/David W Cerny

The export-reliant Czech economy has shown accelerating growth since ending a record-long recession in 2013.

Inflation, however, remains subdued despite a pickup in consumer demand, and the central bank expects to keep its policy of using interventions to prevent the crown firming past the 27 to the euro level in place throughout next year to keep monetary conditions loose.

Rate-setter Jiri Rusnok told Reuters he had seen nothing yet to change that view. On the economy, he said growing domestic consumption would be a bigger driver in the future, offsetting a lesser impact from export growth.

“We are experiencing a recovery but the recovery is relatively fragile,” he said on the sidelines of an economic conference in the Czech Republic’s industrial northeast.

“Exports will drive us less than we have become used to in recent years and domestic consumption will drive us a little bit more, and let’s hope also investments.”

The central bank launched its weak crown policy almost a year ago to battle deflationary risks by boosting import prices, a move that increased slack consumer demand by prompting shoppers to stop waiting for costs to fall.

A center-left government that took power in January is also reversing years of austerity and looking at more investments to help the economy.

The revival of domestic demand comes as the euro zone, central Europe’s most important trading partner, struggles with weaker growth and slow inflation.

While the Czech economy grew by 0.3 percent on a quarterly basis in the second quarter - a fifth straight rise - analysts see growth running into headwinds from weaker trade.

Rusnok, who joined the central bank in March, said the troubles in the euro zone were still an uncertainty for the economy.

“It is primarily Europe and especially the euro zone,” he said when asked about risks. “For us, the direct impact of the Russia-Ukraine problem is tiny.”

The central bank had already delayed the expected exit from its unconventional policy twice before this year but left its commitment in place at its last meeting on Sept. 25.

“We will continue with our monetary policy settings (and) that ... will continue at least through all of next year,” Rusnok said.

The bank’s latest outlook sees inflation returning to a 2 percent target by the end of 2015. It has highlighted lower inflation and growth projections in the euro zone, along with lower global oil and food prices, as anti-inflationary factors. [ID:nL6N0RQ30A]

Writing by Jason Hovet; Editing by Michael Kahn and Alison Williams

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