Česká národní banka

Czech Policy Maker Benda Sees Rate Hike Possible Within a Year

(Bloomberg 17. 5. 2017)

The Czech central bank should be able to lift borrowing costs from zero within a year, with currency appreciation playing the deciding role in the timing and pace of tightening, board member Vojtech Benda said in an interview.

The economy is generating enough demand-driven pressure on consumer prices to keep inflation on a sustainable path, Benda, 41, said Tuesday at his office in Prague. A slowdown in headline inflation last month was partly caused by volatile food prices, and overall price growth should return above the bank’s 2 percent target for the rest of the year, he said.

After the Czech National Bank abandoned its Swiss-style regime limiting currency appreciation, the central bank may be the first among its counterparts in central Europe to raise borrowing costs. The outlook for raising the benchmark from 0.05 percent depends on koruna gains, which have been modest since the April 6 exit from the one-sided peg, because a stronger currency makes Czech exports less competitive and curbs import prices.

“If the koruna shows only moderate appreciation, it would create conditions for raising interest rates,” said Benda. “This would be preferable from the financial-stability perspective, as it would tighten credit conditions and cool off demand for loans. We’ll see how the exchange rate develops, and then decide when to raise interest rates.”

The koruna has gained 2.3 percent against the euro in the six weeks since it was set free, a sharp contrast with the Swiss franc, which jumped as much as 41 percent when the country abandoned its currency cap in January 2015.

The appreciation has been constrained by large speculative positions built up before the exit as investors seeking to close positions are struggling to find koruna buyers.

“As the koruna is now returning to a new equilibrium, it doesn’t have to strengthen so sharply because the domestic price level has increased,” said Benda. “The exchange rate could be relatively close to its equilibrium already, so there shouldn’t be dramatic appreciation jumps in the coming months.”

The central bank’s latest forecast assumes market interest rates rising in the third quarter of this year, as well as in 2018, but it would be “pointless” to speculate about the number of future rate hikes or when exactly they’ll happen, according to Benda.

“I agree with the forecast that the policy rates shouldn’t be at zero one year from now,” he said, noting that the bank’s prognosis is indicative and not binding for the board. “I’d like to see the tightening to be balanced, with part of it coming via the exchange rate and part being delivered through interest rates. This would allow the central bank to use rates as the main tool again if monetary-policy action is needed in the future.”