Česká národní banka

Czech Economy Needs Higher Rates, Central Bank’s Forecaster Says

By Krystof Chamonikolas (Bloomberg 18. 10. 2017)

The Czech koruna’s slow appreciation is paving the way for policy makers to raise interest rates faster than forecast because the currency isn’t delivering the monetary tightening the economy needs, the central bank’s chief economist said.

Wage growth and the economy’s rapid expansion are outpacing the Czech National Bank’s outlook and eclipsing a slower advance in producer prices abroad, Tomas Holub said in an interview in Prague on Tuesday.

His team is finalizing new projections for a Nov. 2 meeting that may provide a stronger argument for the seven-member policy board to tighten after they delivered Europe’s first rate hike in August and debated another increase last month.

“Overall, we’re in a slightly more inflationary environment,” Holub said. “In a way, we are glad the overbought market is curbing koruna appreciation because it allows us to start normalizing interest rates more quickly. Our economy needs higher rates.”

Czech price growth is outpacing that of most other European Union nations, hovering above the bank’s 2 percent target as workers emboldened by the bloc’s lowest unemployment rate demand higher pay. Holub said the koruna’s 5 percent gain since April, when rate setters scrapped a lid on appreciation imposed in 2013, is trailing the monetary authority’s assumptions because of oversized bets on the currency held by foreign investors.

“This is nice, as we can move away from the territory of zero interest rates, where monetary policy has less room to maneuver and has to resort to unconventional tools that, as we know, are always unpopular,” Holub said. “Our financial- stability department also prefers monetary tightening via rates, because the rates are more immediately countering the risk of a housing-market spiral.”

While the board voted by a thin majority to keep the cost of borrowing unchanged at its last policy meeting on Sept. 27, three of the seven members sought a 25 basis-point hike. That showed the central bank was moving closer to raising again after its previous forecast from August signaled a yearlong pause in tightening.

The Czech currency traded at 25.74 per euro on Wednesday, up 1.3 percent since Aug. 3 when the bank raised its key rate to 0.25 percent, almost five years after it cut the rate to a record-low 0.05 percent. Holub said the room for more gains is limited because some foreigners may begin closing long currency positions at around 25.80 per euro, a level last seen just before the central bank began its intervention regime.

Breaching Barrier

“The koruna now seems to have found a new barrier that is not so easy to breach,” Holub said. “For a number of investors, this level may have been their target, and it may be a trigger for profit taking, which in turn prevents further appreciation.”

The fresh CNB projections won’t reflect the European Central Bank’s plans for adjustments to its quantitative easing program, expected to be announced on Oct. 26, according to Holub. He said the Czech monetary authority’s forecasts are currently based on the assumption its euro-area counterpart will discontinue its stimulus in mid-2018 after cutting asset purchases by 10 billion euros ($11.8 billion) per month starting in January.

Holub also said the central bank in Prague will probably resume the publication of its forecasts for the euro-koruna exchange rate next month or in early 2018, after suspending the disclosures during the intervention regime.