ČNB: M. Mora v rozhovoru pro Bloomberg

Interview of Marek Mora, Deputy Governor
By Krystof Chamonikolas and Peter Laca (Bloomberg 23. 3. 2022)

The Czech Republic will probably have to raise interest rates to “well above 5%” to slow inflation even as the war in Ukraine brings risks to economic growth in Europe, according to a senior central banker.

Deputy Governor Marek Mora said he’ll probably back at least a half-percentage point increase in the key rate on March 31, from the current 4.5%, and then support lifting it more to “as high as necessary.”

With Russia’s invasion boosting energy costs and triggering a “stagflationary shock,” policy makers need to cool domestic demand more as a worker shortage fuels a push for higher wages and prompts Czechs to spend more, he said in an interview on Tuesday.

“I expect a debate about another rate hike, and the only question is how big,” Mora said about next week’s meeting. “Eventually, I believe the circumstances will force us to go well above 5% with rates.”

The Czech koruna gained 0.8% against the euro after Mora’s comments, outperforming all 31 major currencies tracked by Bloomberg worldwide except for the Russian ruble. The yield on the government’s 10-year bonds jumped 15 basis points to 3.97%, the highest in more than decade.

Czech policy makers were among the first in the world to warn about long-term inflation risks caused by pandemic lockdowns and supply-chain disruptions. But even after raising borrowing costs by a cumulative 4.25 percentage points since June, the central bank says consumer price growth may accelerate to around 13%-14% this summer, from 11.1% in February.

Before Russia attacked Ukraine, policy makers signaled they were almost done with tightening and might start cutting rates around the end of this year. Like many of their peers, they’re now facing a dilemma of tackling inflation at a time of downside risks to growth.

“Though the risk of stagnation is real, the economic slowdown may not be that bad, mainly because we have a very tight labor market,” he said. “People still have huge savings and keep spending.”

Governor Jiri Rusnok said on Sunday that the board will debate whether to sell some of its vast foreign-currency reserves to temporarily strengthen the koruna as an auxiliary method of curbing price growth. The bank earlier this month began intervening in the market to prevent excessive koruna weakening.

Mora is open to a debate about expanding the interventions, but he said he’d be “very hesitant” to use such tool for monetary-policy purposes, because it would be hard to implement and credibly explain.

“By using the exchange rate, you might deliver your goals more quickly, but you will damage your transparency and predictability, Mora said. “I see more costs than benefits of such a policy.”

The 50-year-old deputy governor also sees an additional effect of higher rates helping the koruna appreciate, which would amplify tightening.

With households holding more savings than debt, and the manufacturing industry listing shortages of materials and workers as their biggest constrains, the economy can withstand even higher interest rates, he said.

“The central bank will eventually manage to push inflation down,” he said. “The only question is at what cost. We obviously must not kill the economy, but I don’t believe we will.”