V. Benda k výhledu úrokových sazeb (26.4.2021)

Interview of Vojtěch Benda, Bank Board member
By Krystof Chamonikolas and Peter Laca (Bloomberg 26. 4. 2021)

The Czech Republic will probably raise interest rates fewer times this year than official projections show because of the lingering impact of the pandemic, according to central bank board member Vojtech Benda.

The economy must return to a “long-term, sustainable growth trajectory” before the timing of monetary-policy tightening can be debated, Benda said Friday in an interview. He still expects benchmark borrowing costs to be lifted in the second half of 2021 but doesn’t see all three increases implied in the winter forecast coming to pass by year-end.

The Czechs will probably still lead the European Union in hiking rates, with inflation in the country of 10.7 million people stuck above-target due to a shortage of workers and high government outlays. While investors see the first move coming as early as this summer, Benda said restrained spending once the latest four-month lockdown ends could limit the need for further action this year. “The pandemic shock was rather severe, and I don’t believe people will immediately take all their savings and go shopping like crazy,” the 45-year-old economist said. “Three hikes this year would only be realistic if we saw an uncontrolled economic recovery, which I don’t assume will happen.”

The revival so far is uneven. While most retail and hospitality businesses have been closed since late December, the key manufacturing industry is benefiting from strong export demand. Shops and some services will reopen on May 3, but restaurants and hotels will resume operations later, depending on infection and vaccination trends.

Resilient inflation, low unemployment and a faster path to monetary tightening stand out in comparison with the euro area, the Czech Republic’s biggest trading partner. The nation is also alone in the region in financing record budget deficits without help from quantitative easing.

Benda said those factors may make the Czech policy path seem “very hawkish” compared with the European Central Bank or the U.S. Federal Reserve.

“But even when we do start tightening, our deeply negative real rates will only get less negative and our monetary conditions will still remain expansionary for quite a long period of time,” he said. “So I don’t see this as hitting the brakes.” Investors last week boosted bets on Czech rate hikes. Forward-rate agreements now price in at least two quarter-point increases this year, starting in August or September, and a total of five by the end of 2022. “The market is reading us very well in the longer term,” Benda said. “It’s pointless to agonize now over whether the first hike will be in four, five or seven months, as we’re living in huge uncertainty.”