ČNB: Tomáš Holub – Hlavní výzva je teď ukotvení inflačních očekávání

Interview of Tomáš Holub, Bank Board member
By Robert Muller (Reuters 26. 10. 2022)

The Czech National Bank should raise interest rates once more at least to send a signal amid rising inflation expectations that it really means to tame prices, board member Tomas Holub said.

The central bank has raised its main interest rate by 675 basis points in total in a year-long tightening cycle ended in June. The two-week repo rate has stayed at 7.00% since, while inflation has quickened to 18.0%.

Holub, who voted for all the hikes, has been in a minority since July when another board member, Ales Michl, became governor and together with three new board members swung the majority towards rate stability.

Holub said that although the central bank looks around 18 months ahead with its decisions, it inflation expectations shaped by current data mattered more now.

"Anchoring inflation expectations is the main challenge for monetary policy now," Holub told Reuters.

"The current situation still raises a concern if the inflation expectations are well anchored," he said.

According to a central bank survey, companies expect year-on-year inflation to be at 10.3% in one year and at 7.5% in three years, well above the central bank's 2% target set with a tolerance band of one percentage point in either direction.

March 2021 was the last time when the inflation expectations were within this tolerance band.

The concern about inflation expectations, illustrated by wage growth above the central bank expectations, and major global central banks turning hawkish were the main reasons for Holub to seek further policy tightening.

"It is appropriate to send a monetary policy signal that the central bank is really serious about fighting inflation... the situation still calls for one more rate hike at least," he said.

"My previous votes were for a higher raise than the standard, I don't have any reason to change that... 25 basis points would not impress the market," Holub said.

Besides raising interest rates, the central bank has employed interventions in the foreign exchange market since May to prevent the crown from weakening which would hamper its efforts to tame inflation.

The central bank's reserves dropped to 139.4 billion euros as of the end of September from 160.4 billion in April.

Holub said that although he saw interest rates as the central bank's main tool, to which interventions should be only complementary, the "relatively strong" currency was positive.

"A weaker exchange rate would not be a welcome factor in the environment of high inflation as it would pour oil into the flame and feed the inflation," he said.

Ending the interventions could be considered only when exchange rate would stabilise at level acceptable to the bank without support, he said.

"I am not certain that in a situation of quite turbulent global financial markets, we can hope for this to occur in the near term," he said.