Česká národní banka

CNB > Media service > Interviews, articles > 2018 > 18-09-11

Czech Rates Can Rise Further for Dedek But Caution Is Warranted

By Peter Laca (Bloomberg 11. 9. 2018)

The Czech central bank has room to raise interest rates further but should proceed with caution over the longer term, according to board member Oldrich Dedek. Tightening monetary policy too fast could hurt the economy if global risks escalate, he said in an interview in Prague. Domestic data are confirming the central bank’s forecast from August, with robust wage growth and record-low unemployment underscoring inflationary pressures stemming from the labor market, the rate setter said on Tuesday.

“On balance, I think there is probably some room for monetary-policy tightening in the short term, but it should be done with a lot of caution,” he said. “It shouldn’t be a race to get to some kind of a neutral level as fast as possible.” Once at the forefront of rate increases in Europe with five hikes since August 2017, the Czech central bank is mapping out the case for more after its increase last month brought the benchmark to 1.25 percent. Policy makers have signaled at least one other move in 2018, and investors have boosted bets on the next hike happening already this month after an uptick in August inflation.

Dedek declined to say if he’s already made up his mind on how to vote at a meeting Sept. 26. The central bank’s forecast will guide policy deliberations, he said. “The main story still holds -- there haven’t been any strong data that would be contradicting the forecast,” Dedek said. “I don’t think that monetary policy is behind the curve.” Minutes from the previous meeting, held on Aug. 2, indicated that the internal forecasts had implied a 50 basis- point hike, which the board rejected. Instead, the panel unanimously voted for the smaller move to avoid the risk of excessive koruna appreciation and because the members preferred gradual tightening to avoid the impression of a “panic reaction.”

Other board members may have a different assessment of the economy and see more pronounced inflation risks, Dedek said, adding that he isn’t too worried about price growth running above the 2 percent percent target because it’s still within the central bank’s tolerance band.

External threats such as the impact of Brexit or global trade tensions could potentially affect the small and open Czech economy via trade channels, Dedek warned.

“The notion of normalizing rates is valid, but the question I’m asking is how to proceed with normalization in a situation when there are more and more risks appearing in the external environment,” he said.

The Czech central bank should avoid a situation when monetary policy would have to be abruptly reversed if rates rise too fast or too much, according to Dedek.

“I’m personally not a big fan of what I call a roller- coaster approach,” he said. “The monetary-policy path should be smooth.”