M. Mora – Diskuse o sazbách nebude v květnu jednoduchá

Interview of Marek Mora, Deputy Governor
By Jan Lopatka (Reuters 26. 4. 2022)

The Czech central bank faces a dilemma whether to raise interest rates further as inflation soars but demand gets hit by falling real incomes, central bank Vice-Governor Marek Mora said on Tuesday.

The bank has lifted its base rate by 475 basis points since last June, but it has begun to temper the pace and sent signals it may be near the top.

In March, a 50 basis point rise put the two-week repo rate at 5.00%, the highest since 2001.

Mora said in an interview he did not have a ceiling where rates could go, but it was possible past hikes and the expected demand hit may be already enough.

"Interest rates are at a relatively high level, and they are probably beginning to have a restrictive effect," Mora told Reuters.

"When I add the impact of higher prices on disposable income, which will cool demand significantly, it raises the question to what extent it still makes sense to tie up the economy by rates and to what extent the economy will cool autonomously."

"I can imagine we will not hike rates at all now in May. But I can also imagine that we will hike by perhaps a percentage point. It does not seem very likely to me but it can happen," he said.

Mora, one of the candidates to replace Governor Jiri Rusnok whose term ends in June, said he expected the bank's new quarterly forecast due at the May 5 policy meeting to cut this year's growth outlook significantly from 3.0%.

"Maybe we will be happy about positive zero," he said.

Inflation climbed to 24-year high of 12.7% in March as commodity price shocks and supply disruptions after Russia's invasion of Ukraine add to domestic price pressures.

Hit to real wages

Mora said he saw inflation peaking around 14%, possibly 15% in June, average around 12% this year and approaching the bank's 1-3% target in the first half of 2023.

"Nominal wage growth will not even closely cover inflation. We will have a real wage drop this year, I would estimate a drop around 6-8%," he said. "This can of course have an impact on demand."

He said he considered debate on possibly selling part of the bank's large foreign currency reserves to bring down inflation to be shelved.

But he said the central bank could expand a scheme under which the bank sells part of returns earned on its foreign currency assets.

Those sales have been meant to be done in a way that they affect the exchange rate as little as possible.

"I can imagine we can raise the volume of transactions and thus lower our sensitivity to the impact on the exchange rate. But even by these operations we are not targetting and we will not target any concrete exchange rate."