Interview of Vojtěch Benda, Bank Board member
By Krystof Chamonikolas and Lenka Ponikelska (Bloomberg 13. 6. 2019)
The Czech economy warrants higher interest rates as domestic price pressures outweigh the effects of a global slowdown, according to central banker Vojtech Benda.
The most vocal supporter of Czech policy tightening is optimistic the country can weather a souring outlook abroad that has prompted a dovish turn by the world's major central banks.
Robust private consumption and chronic koruna weakness may prompt him to vote for an increase in borrowing costs, already the highest in a decade, as soon as June 26, Benda said in an interview on Wednesday.
“I see the overall balance of risks as rather inflationary,” said Benda. “I will carefully consider whether there's room for another hike already at the next meeting, or if we should wait for more clarity about developments abroad.”
Benda’s comments contrast with last month’s forecast from the Czech National Bank, which announced it saw a year of stable borrowing costs and said the next move could be up or down following eight increases in the past two years. While weakening demand abroad is negative for the export-oriented economy, that's being countered by an increase in household consumption, fueled by the lowest unemployment rate in the European Union.
Read more about how accelerating inflation is challenging the central bank’s forecast “I don’t regard developments abroad as a significant anti-inflationary risk, not in an alarming way,” said Benda. The 43-year-old economist voted for a rate increase at each of the central bank’s past eight policy meetings.
Besides helping Czech exporters, the koruna’s weakness has been a key factor in the unprecedented string of rate hikes because it’s pushing prices higher, with inflation now running above target. The currency has defied central-bank forecasts for appreciation for more than a year because of oversized long positions held by foreign investors.
The outlook for U.S. interest rates is also playing a role. While previous tightening by the Federal Reserve has contributed to Czech currency weakness, the emerging prospect of lower U.S. rates could reignite inflows into higher-yielding currencies.
“It’s clear that we have moved quite close to the neutral rate, so we will very carefully consider any further change,” Benda said. “I can see room for a further increase in rates, but it will depend a lot on the exchange-rate development, as well as on the expectations for Fed rates.”