T. Holub – Zvýšení by pomohlo proti mzdově-inflační spirále

Interview of Tomáš Holub, Bank Board member
By Krystof Chamonikolas and Peter Laca (Bloomberg 21. 9. 2022)

The Czech Republic should raise interest rates now to reduce the risk of a 1970s US-style price shock forcing more severe monetary tightening later, according to a member of the central bank’s hawkish minority.

Inflation slowing to 17.2% in August – the first deceleration in more than a year – was a “favorable surprise” suggesting that price growth may peak below 20%, Tomas Holub said in an interview. But there are still price pressures requiring further steps to cool the economy, stemming from stronger-than-forecast economic and wage growth and household consumption, he said.

Holub’s view contrasts with that of the board’s majority, which sees no need to raise borrowing costs further. Several members who oppose further hikes have pointed to slowing growth in money supply and credit as well as declining retail sales as signs of weakening home-grown inflation risks.

“The question now is how quickly we will get inflation down to our target,” said Holub, who is 48. “I’m not saying we should keep hiking forever, but the cycle feels incomplete to me. A bit more tightening would provide us with a safety buffer against a price-wage spiral.”

Following a major summer shuffle of the board’s seven-member lineup, the central bank last month halted an aggressive tightening campaign that lifted the benchmark rate to the highest since 1999. Policy makers are weighing the risks of a prolonged inflation overshoot against economic recession, and most of them have signaled that borrowing costs will stay unchanged at their Sept. 29 meeting.

Holub said he was concerned that a forecast of inflation averaging 10% next year, combined with the EU’s lowest unemployment rate, may fuel wage demands that will keep price growth high for longer than the bank currently assumes.

While inflation expectations are hard to measure, there are ample signs that they’re decoupling from the target, including wage demands, companies’ willingness to raise salaries and pass on the cost to consumers, he said. Holub, the central bank’s chief economist until he was named to the board 2018, unsuccessfully sought a 100 basis-point hike in August.

Holub favors the bank’s alternative forecast scenario, which assumes additional tightening now and reaching the 2% inflation goal faster. He said that would make the expected economic contraction only slightly worse than that outlined in the baseline projection, with stable borrowing costs and a longer time frame for reaching the target.

“I don’t want to drive the economy into the ground,” Holub said. “But I would rather sacrifice roughly 0.2% of gross domestic product to avoid the scenario of the 1970s, with its even more drastic and economically painful cure.”

One of the new board members, Jan Frait, earlier this month argued against efforts to significantly accelerate the disinflation process, saying it would cause “excessive costs” for the economy, including a considerable increase in unemployment.

By contrast, Holub called for doing “all it takes to reach the inflation target as soon as we can.”

“Safeguarding price stability is our primary mandate,” he said. “We can only consider undesirable side-effects on the economy when price stability is secured, which I think is clearly not the case with 17% inflation.”