World Economy

Czechs May Need Loose Monetary Policy

Czechs May Need Loose Monetary PolicyCzechs May Need Loose Monetary Policy

The Czech central bank may need to stick to loose monetary policy beyond next year as price growth remains below target and global economic trends pose downside risks to the inflation outlook, Vice Governor Vladimir Tomsik said.

While Czech output is “relatively robust,” it’s partly driven by one-time factors, and the economy will be “far from overheating” next year, Tomsik said in a blog on the central bank’s website on Wednesday. He reiterated the bank will keep the current limit on koruna gains, set at around 27 against the euro, at least until the middle of 2016, Bloomberg reported.

Despite economic growth accelerating to 4.4% from a year earlier in the second quarter–a seven-year high–the slowing expansion in China and other emerging markets, combined with declining commodity prices, may create disinflationary risks for the Czech Republic, Tomsik said.

“That means that the need to maintain loose monetary policy may last for longer than currently suggested by the forecast,” he said.

His comments echo the minutes from the bank’s Aug. 6 rate-setting meeting, at which policy makers repeatedly said monetary conditions not fully passing through to inflation and the prospect of low wage growth “could be an argument for a later exit from the use of the exchange rate as a monetary-policy instrument.”

The monetary authority in Prague currently sees inflation staying below its 2% target until early 2017. The bank’s forecast envisages using weak-koruna policy until the end of next year.

The koruna traded little changed at 27.02 per euro, remaining near the cap level after gaining 2.4% against the euro this year.