Czech central bank governor Miroslav Singer “had a very difficult situation to deal with”, according to Peter Attard Montalto, emerging markets economist at Nomura. “A large part of his time as governor, there was an interim government in place which was not able to actually fix fiscal challenges and undertake the right structural reforms,” Montalto says. “Then a government did come into place, the last government there, and they did a lot of fiscal reforms and structural reforms that were very positive. But the flip side of that is that they went too far on fiscal consolidation; they created this sense that the country was in a huge crisis and this is why they were taking those measures.”
In the second quarter of this year, the Czech economy finally got out of a recession that lasted for six quarters, growing by 0.7% quarter-on-quarter; but year-on-year it still contracted by 1.2%.
Neil Shearing, chief emerging markets economist with Capital Economics, believes that Singer “deserves an honourable mention for bold action in the face of weakening growth”.
The central bank, “by verbal interventions and proper signalling to the market”, prevented the appreciation of the Czech koruna, which would have harmed the small, open economy in which trade has a high share, Murat Ulgen, chief economist for CEEMEA and sub-Saharan Africa at HSBC, says. “The monetary policy alone cannot boost growth; the economy is likely to contract again this year,” he adds. “However, the CNB safeguards financial stability, and the non-performing loan ratio has been kept stable. In many ways, we reckon the CNB has prevented even deeper contraction.”
Montalto believes consumer and investor confidence have taken a hit because “basically people took on board this message from the previous government that there was such a huge crisis.”
But financial intermediation in the Czech economy is very good, and banks are going through “a normal cyclical cycle”; they are not likely to introduce deleveraging measures of the kind that were seen in weaker economies such as those in south-east Europe and in Hungary, Montalto points out.
He believes Singer’s greatest quality is his precise communication style. “He’s quite blunt and down to earth, and I think that gained him a lot of respect.” —Antonia Oprita, Phil Thornton
EM INTERVIEW The Czech central bank’s achievements extend to three areas over the past year, governor Miroslav Singer told Emerging Markets. First, in the field of monetary policy the central bank got ready for the zero-bound interest rates “well enough ahead”, according to Singer.
“This involved many quite intensive discussions by the board and experts and a lot of preparation,” he says. “Consequently, we were able to communicate in quite a credible and well-organized manner that our next tool will be forex interventions. This, in turn, caused our verbal interventions – which we have already started – to influence the exchange rate in the direction we wished.”
The central bank’s second area of focus was the complex process of European Union macrostability framework. Together with its partners in various government agencies, the Czech central bank was able to steer the rules that make up the EU’s Single Supervisory Mechanism (SSM) – part of the laborious plans to create a banking union – in a direction that coincided with the priorities set for the Czech economy. “Again, this involved extremely intensive efforts by relevant experts and members of the board last fall,” Singer says. “The result does not entirely fulfil our wishes, but is still something we can live and work with.”
The third area was that of internal organization, the central bank governor says, adding: “Last year we successfully streamlined our organization, and we are currently the leanest we have ever been in terms of number of employees.”
The discussions over the SSM rules and the Czech central bank’s preparations for zero interest rates “certainly gave rise to the most labour-intensive fall I have spent at the Czech National Bank,” Singer says. “I have no particular recipe for dealing with stress and a heavy workload – you just do what you have to do. It also helps to regularly compliment those who contribute a lot.”
The biggest external challenges for the Czech economy are still the eurozone’s problems and the lack of growth in many major economies in the EU. The only way to cope with these challenges is “to try to get our monetary and supervisory policies and actions right”. Internally, returning to growth, “including in the domestic demand segment”, is the biggest trial for the Czech economy, according to Singer. “This will also involve restoring consumer and investor confidence,” he says.
Inflation, on the other hand, is not a worry for the Czech central bank “for the foreseeable future”, says Singer, who does not see “any significant upward price impacts materializing”. —A.O.