Česká národní banka

Czech inflation slowdown masks lurking price pressure for Rusnok

By Krystof Chamonikolas, Lenka Ponikelska (Bloomberg 11. 12. 2018)

Slower Czech inflation is masking price trends that may require action next year to cool the economy, according to the head of the central bank.

A global front-runner in raising interest rates with five hikes this year alone, the bank has signaled a possible pause at its final policy meeting of the year on Dec. 20. While favoring that scenario, Governor Jiri Rusnok still sees underlying price pressure caused by a deepening labor shortage that forces employers to raise salaries.

“Unemployment has been constantly surprising us by declining even lower than we thought possible,” Rusnok said Monday in an interview in Prague. “It’s revealing an overheated job market and creating expectations that the pressure on wage growth will be durable and robust.”

Central banks in eastern Europe are assessing souring economic data out of the euro area, the region’s primary export market, and even talk of a U.S. recession. With oil prices also falling, inflation pressures are receding. Romania’s central bank said Monday that consumer-price growth had returned to its target band a month earlier than expected.

Czech inflation, which has trailed forecasts for almost half a year mainly because of volatile items such as food, will rebound in early 2019, Rusnok said at his office. Another factor pushing prices higher is the koruna, which has defied forecasts to appreciate all year, triggering an unprecedented four consecutive rate increases between June and November.

‘No Rush’

The exchange rate is currently distorted by seasonal market swings as banks try to shrink their balance sheets for regulatory reasons, according to Rusnok. He’s “slightly in favor of waiting until next year” to lift borrowing costs and sees debate “increasingly tilting toward the view that there’s no rush” to raise rates.

“The reasons for a pause in tightening include the year-end effect that’s obscuring the picture right now,” he said.

The Czech currency has slid 1.2 percent this year against the euro as trade and geopolitical tensions dented sentiment toward emerging markets. The central bank’s projections assume the koruna will rally about 6 percent in 2019 while interest rates will be broadly stable. The bank says a 1 percent exchange-rate gain delivers approximately the same amount of monetary tightening as a 25 basis-point rate increase.