Bigger rate hike gains more traction at Czech central bank

Interview of Marek Mora, Deputy Governor
By Krystof Chamonikolas and Peter Laca (Bloomberg 16. 9. 2021)

The Czech central bank may accelerate its interest rate increases this month to tame unexpectedly fast inflation fueled by the lowest jobless rate in the European Union, Deputy Governor Marek Mora said. Yields on government bonds increased.

While global factors are driving consumer prices higher, Mora said the main inflationary challenge for the Czechs was “very robust” home-grown pressures linked to a shortage of workers that has persisted despite pandemic workplace disruptions.

He was the second Czech rate-setter this week to say that, after two quarter-point hikes this summer, the board may hike by a half point when it meets on Sept. 30. If it does, it would be the biggest tightening move in the EU in almost a decade.

“The odds are now clearly between 25 and 50 basis points, possibly closer to 50,” Mora said in an interview on Wednesday. “The urgency has certainly increased, although to vote for 50 basis points I’ll need our staff to justify this with more detailed data and we would need to explain it properly.”

While the neighboring euro area and Poland are sticking with bond buying and record-low rates to spur their economies, the Czech Republic and Hungary have raised borrowing costs to rein in rapid price growth. Czech inflation jumped to the fastest since 2008 last month and has run above the central bank’s 2% target for almost three years.

Unlike central banks that are emphasizing the transitory nature of inflation, Mora said the tight Czech labor market requires action, rather than only words. The nation of 10.7 million still registers more available jobs than unemployed people, even after months of a tight pandemic lockdown earlier this year.

“The Czech economy now seems more inflationary than we thought,” he said.

Along with a lack of workers that’s driving rapid wage growth, potential inflationary risks also include elevated household savings and government spending, according to Mora. For him, the current hikes mean that the central bank is only “gradually scaling back still very relaxed” monetary conditions rather than tightening them.

Money-market prices now show bets for half-point tightening steps at both the Sept. 30 and Nov. 4 policy meetings, after which investors expect the pace to slow. The yield on the government’s five-year bonds rose 3 basis points to 2.01%, trading at the biggest premium over German bunds in more than two decades.

Mora declined to comment on the policy outlook beyond September, pointing to lingering uncertainties. He said an eventual drop in the global prices of materials and slow vaccination in parts of the world, among other factors, could result in “temporary disinflationary or even deflationary pressures” at home in 12 to 18 months.

At the last two rate meetings, the 50-year-old economist voted with the majority of the seven-member board for a standard quarter-point hike. Two policy makers wanted no change and one sought a half-point increase, a step that the bank has never taken since it started targeting inflation more than two decades ago. The last hike of that magnitude in the EU was from Hungary in 2011.

“We probably won’t make a big mistake if we move slightly faster than we have so far,” said Mora. “It’s possible the overall magnitude of tightening will be the same, but we’ll need to front-load it more.”