Napjatý trh práce a uvolněná fiskální politika představují přetrvávající inflační rizika - Eva Zamrazilová

Interview of Eva Zamrazilová, CNB Deputy Governor
by Peter Laca and Krystof Chamonikolas (Bloomberg 22. 3. 2023)

• Zamrazilova says strong koruna to tighten policy for exporters
• Deputy governor sees wages, tight job market as price risks

Czech inflation is likely to ease rapidly this year but accumulated price risks may prevent monetary easing from happening as quickly as investors expect, a senior central banker said.

After the Czechs halted aggressive rate hikes last summer, money-market prices now show zero likelihood of a further increase in borrowing costs and indicate wagers on at least 125 basis points of cuts this year, starting in June or August.

That may be too soon for central bank Deputy Governor Eva Zamrazilova, who said in an interview Tuesday that she wants to make sure inflation pressures are fully contained. Before any rate cut debate, she would like to see inflation below 10%, and review data for second-quarter wage growth and household consumption. Those won’t be available before September.

“I won’t even think about interest-rate cuts until inflation slows to single digits,” Zamrazilova said. “We definitely won’t start lowering rates until we see some easing of these persistent economic imbalances stemming from the tight labor market and loose fiscal policy.”

The economy is showing signs supporting the bank’s projection of price growth easing “rather dynamically” in the second half of the year, according to Zamrazilova. Household spending declined more than forecast in the fourth quarter, retail sales extended their year-on-year drop in January and the koruna traded stronger than the bank had expected, she said.

But there are also risks that will keep the debate about a potential further increase on the table in the coming meetings, she said, calling manufacturing and construction salary growth a “warning signal.” Zamrazilova said she will pay “particular attention” to data for the first quarter to see if they indicate a bigger danger of a wage-price spiral.

The deputy governor has voted with the majority to keep the benchmark rate at 7%, the highest since 1999. While staff forecasts have implied further hikes, followed by cuts months later, she is “deeply skeptical” that such a purely model-based approach can easily stem long-brewing risks from the tight labor market, big budget deficits and previous loose monetary policy.

“It’s simply impossible to restore a lasting inflation balance through a quick and forceful action,” she said. “Our core approach is keeping interest rates elevated for a longer period of time.”

The central bank is counting on a strong currency to target the part of the economy that hasn’t been affected by higher domestic borrowing costs, she said. The bank can’t tighten monetary policy in a way that disproportionately hurts locally-owned, small and medium-sized companies, while large foreign-owned, export-oriented corporations enjoy cheaper financing in euros, according to the deputy governor.

“There can be no level playing field if half of businesses are playing according to our rules and the other half according to some completely different rules,” Zamrazilova said.

The koruna has been more volatile in March because of the global turmoil, but it’s still stronger than the central bank forecast and it’s helping to curb inflation, she said. The currency may benefit from the Czech banking sector being one of the best capitalized and most liquid in Europe, with client deposits significantly exceeding loans.

“While still regarded as an emerging market by some, the Czech Republic is a safe haven when it comes to bank-asset quality,” she said. “So I expect the koruna exchange rate may start reflecting that.”