Česká národní banka

V. Benda: I’m inclined toward faster rate increases

By Kryštof Chamonikolas (Bloomberg 13. 6. 2018)

Czech central banker Vojtech Benda said the weaker-than-expected koruna should prompt a debate on raising interest rates as soon as this month, adding to a growing consensus on the policy-making board to resume rate hikes earlier than planned.

The $195 billion economy is overheating and needs cooling, Benda said in an interview on Wednesday. And since the currency is failing to deliver expected tightening it’s much weaker than the central bank has predicted policy makers need to consider increasing the benchmark from 0.75 percent earlier than their forecast of around end-year, he said.

Benda’s comments underscore intensifying voices from the seven-member board to advance a return to hikes after leading Europe with three between August and February. With May inflation exceeding the bank’s 2 percent target and real wages growing at the fastest in 15 years, the key question is whether the next move will come in two weeks or when the bank releases its new forecasts in August.

“I find it legitimate to discuss raising interest rates already at the June 27 meeting,” Benda said. “To prevent a further build-up of inflationary pressures, I’m inclined toward faster rate increases already this year. But whether I will vote for a hike in June, I can’t say until I see all the available analyses and make a decision.”

The koruna has been 1.3 percent weaker, on average, against the euro this quarter than the central bank’s projections. Benda said the exchange rate, which has been influenced by global factors such as political risks in Italy and Turkey, is the only major deviation from the central bank’s outlook.

He also said that the future path of monetary policy was obscured by "a major uncertainty" regarding the European Central Bank. The expected end of its bond-buying activities is prompting investors to reassess riskier assets across emerging Europe. While the Czechs’ next formal forecast won’t be available until August, the central bank’s staff provide the board with interim analyses of how the economy is performing vis-a-vis the existing projections, he said.

“Since the koruna is weaker than our projections and this is no short-term swing but has been the case for several months it opens room for the more comfortable scenario of tightening monetary conditions via interest-rate increases," he said. “That’s also in harmony with our financial-stability goals.”

Weak Koruna

The central bank estimates that a 1 percent koruna appreciation delivers monetary tightening roughly equivalent to about a quarter point increase in the benchmark, although exchange-rate changes tend to have a swifter impact on inflation.

“The present situation doesn’t require any radical action, but it’s clear that monetary tightening via interest rates will continue,” said Benda. “The pace and magnitude will depend on the exchange rate and other variables.”