O snížení sazeb by se mohlo začít diskutovat koncem roku - Tomáš Holub

Interview of Tomáš Holub, Bank Board member
By Robert Müller (Reuters 10. 3. 2023)

Another Czech interest rate hike is needed to safeguard inflation’s return to target, hawkish central bank policymaker Tomas Holub said on Friday, while admitting arguments for tightening could soon fade.

Holub has been in the minority on the Czech National Bank’s seven-member board since mid-2022, seeking stronger policy tightening to curb inflation running at a three-decade high while the majority has preferred stability to let past rate hikes do their work.

The 48-year-old economist told Reuters in an interview that he would still support a rate hike when the bank meets at the end of March.

While inflation could fall quickly this year, he said he worried about it getting stuck above target next year and that some wage growth concerns were already appearing.

“A signal to the public that the central bank is really serious about fighting inflation and is ready to use its main tool, which are interest rates, would be important,” Holub said.

A debate on eventual rate cuts - which markets are pricing in by the end of the year - can start once it was certain the path back to the 2% inflation target was clear, he said.

Data on Friday showed the Czech headline inflation rate eased in February to 16.7% year-on-year, from 17.5% in January, likely signalling the start of a slow retreat.

Holub said he expected inflation would drop to single digits in the second half of this year, but could get stuck around 4-5% in the first half of 2024.

However, he said the bank’s outlook sees inflation close to target around mid-2024, when any hike delivered after March would start to have an impact given the bank’s 12-18 month policy horizon. That could mean the bank was soon passing the optimal time to tighten.

High inflation has crushed consumer demand as people’s paychecks shrink. Real wages fell 7.5% in 2022, and the Czech economy slipped into a technical recession in the fourth quarter.

The central bank raised its key interest rate between June 2021 and June 2022 from 0.25% to 7.0%, but new Governor Ales Michl has advocated stable rates to anchor the economy since taking the helm in July last year as part of a board revamp.

Lone hawk?

Holub and Michl are the only members left since the reshuffle. One new board member, Jan Kubicek, who joined the board last month, was quoted this week as saying current rate settings should be enough to tame inflation.

The bank has relied in recent months on a strengthening crown, which rose to a nearly 15-year high in this month, and is helping the inflation fight, according to Holub.

Central bankers, though, have not completely taken a hike off the table, wary of renewed demand pressures if wages pick up in what is still the European Union’s tightest labour market.

Holub said wage growth in industry and construction in January, at 12% and 15%, respectively, was a worrying sign.

“Those numbers feed the doubts a bit (about inflation slowing as forecast),” he said.

“I think my argument that a further increase in rates would make sense as an insurance against unanchored inflation expectations and excessive wage developments is still valid,” he said.

Rate cuts, he said, could be debated by the end of this year, when inflation is expected to drop to single-digit levels, conditional on some degree of certainty that it was falling back to target.

“Otherwise, it would be necessary to hold rates at the current, or possibly even slightly higher, level for a longer period of time,” Holub said.