The European Union’s efforts to introduce pan-European financial regulation may be a risk for the Czech banking industry, central bank board member Lubomir Lizal said.
Lizal was commenting euro-area debt crisis, domestic economy and monetary policy in an interview in Prague yesterday.
On the euro-area crisis:
“The basic expectation is that we will probably see several years of muddling through. This means a path of small, gradual steps which may be needed to avert a catastrophe, but aren’t enough to bring a fundamental solution to the crisis.
‘‘Whatever steps we see now, they are still not reversing the pessimistic market sentiment. Even if there is a good measure, it’s not enough to change the market mood.
‘‘I’m skeptical we will see some internal impulse that would change this. I’m afraid the only factor that could turn market sentiment around would have to come from outside, for instance a sudden acceleration in global economic growth.”
“We see a potential risk in proposals leading toward pan- European regulation of the financial sector, as under these circumstances banks would be assessed as a whole group on the European level.
‘‘This would mean domestic regulators will have fewer options to affect undesired behavior of such groups toward a well-capitalized, or, even worse, undercapitalized, subsidiary that the domestic regulator is responsible for.
‘‘In Europe, the general tendency at the time of crises seems to be to invent new regulations, rather than to first analyze whether the existing rules are sufficient, and whether the authorities didn’t fail in imposing them.’’
On the Czech economy:
‘‘The effects visible now are mainly through sentiment, rather than through real economic links. While exports are performing well, domestic demand is less than weak and expectations aren’t too bright either.
‘‘This means companies don’t see reasons for any massive investments, which then reinforces negative sentiment.
‘‘The Czech mentality is to try to prepare for the negative possibilities rather than for the more optimistic ones. At the time of negative news, a typical reaction is to be even more cautious, to be prepared for even worse situation.
On the economic outlook:
‘‘The first-quarter GDP reading was significantly worse than we thought. The 0.7 percent annual decline was quite a negative surprise.
‘‘I assume there will be another change in the tax rates, mainly the value-added tax, which will preserve the difference between the headline inflation and the monetary-policy inflation next year. What I consider important is how this higher inflation affects wage negotiations.
‘‘That will be a reflection of inflation expectations, whether there has been a shift upwards, or whether people are aware that the current situation shouldn’t spark higher wage demands.
‘‘Since the current forecast was published, we have seen lower GDP data, inflation that was more-or-less in line with expectations, and quite a significant weakening of the koruna, which is easing monetary conditions.
‘‘The economy is performing worse than expected, while the overall situation has led to a weaker koruna. The latest forecast assumed a decline in interest rates, but it also assumed an exchange rate at a different (stronger) level.
‘‘That said, the exchange rate may be volatile, and move in either direction relatively quickly.
‘‘What will be important for my decision is to analyze the effects of these two factors.
‘‘The exchange rate is affected by general market mood and the situation in Europe. Investors have a tendency to view any European assets as less credible, and the sentiment now seems to be skewed toward koruna weakening rather than appreciation.’’
‘‘The GDP data were also a negative signal, and will probably be a factor keeping the exchange rate at levels weaker than assumed in our forecast.
‘‘Still, I would consider the risks to the forecast to be rather on the anti-inflationary side at this moment, mainly because of the weak demand in the domestic economy.’’
On fiscal policies:
‘‘In a small and open economy, the government doesn’t really have any options on how to change the trends in the economy quickly.
‘‘Today, in Europe, we are paying the price for past policies, for fiscal deficits from years of economic growth. This is now limiting the room for governments to allow deficits to grow and smooth the economic cycle in years of recession.’’
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