T. Holub – Inflační vývoj vyžaduje další zvýšení sazeb

Interview of Tomáš Holub, Bank Board member
By Krystof Chamonikolas and Peter Laca (Bloomberg 26. 4. 2022)

The Czech central bank needs to press ahead with interest-rate hikes to cool domestic demand even as the impact of the war in Ukraine increases risks to economic growth, according to board member Tomas Holub.

After a cumulative 475 basis points of rate hikes since June, policy makers should lift the benchmark by at least another half percentage point next week in an effort to prevent current “extreme” price pressures from becoming entrenched, Holub said in an interview on Monday.

A significant part of the nation’s manufacturing industry is grappling with input shortages as well as rising energy and labor costs. But so far companies have managed to pass on the higher costs to customers, who are empowered by a tight labor market and savings accumulated during the pandemic, according to the central banker.

“This shows that the original external inflation shock has already passed through to domestic price developments,” Holub said. “We need to keep raising interest rates -- the only question is how much.”

While major peers including the Federal Reserve and the European Central Bank are at the beginning of their monetary-tightening cycles, the Czechs have done most of the heavy lifting and are now debating where exactly their rates should peak and for how long.

After Russia’s invasion of Ukraine pushed up energy prices and compounded supply-chain disruptions, Holub expects the central bank’s May forecast to be more “stagflationary” than previously. The fastest inflation in a quarter century is likely to accelerate further in coming months, while the export-oriented economy as a whole is likely to stagnate for most of this year.

While that’s deepening the policy dilemma, rate setters need to stick to their mandate of preserving price stability and the home-grown pressures require more tightening, according to the bank’s 47-year-old former chief economist.

“With inflation at 13% and rising, and at the same time a very tight labor market, it would be hard for me not to focus on curbing inflation just because it could slightly increase unemployment,” said Holub.

The central banker isn’t “ideologically opposed” to the option of tightening monetary conditions via market interventions to strengthen the koruna, but said that such a tool would be useful only if rates grew so much that they would threaten financial stability, which isn’t the case now.

Elevated inflation expectations make the current key rate at 5% less restrictive than in normal times, he said. On top of that, expected rapid tightening by the U.S. Fed could narrow the Czech interest-rate premium and curb the koruna’s appeal for investors, which is another reason Holub cited to keep lifting borrowing costs.

“I’m expecting a broader range of views on how much we should hike next week, but for me 50 basis points is the minimum we should be considering,” he said. “That also suggests to me that the market pricing of a peak around 6% is fairly realistic.”

The group of policy makers that has backed the rapid tightening in the past months has started to show slightly diverging views on how much more room is left for rate hikes. Governor Jiri Rusnok said last week that any further steps should be essentially cosmetic.

“I’m currently on the more hawkish end of the spectrum of opinions because I believe the price development is now so extreme that inflation expectations are already rising,” said Holub. “It’s no longer an abstract concept that central bankers traditionally talk about. It’s real and we can see it.”