Interview of Tomáš Holub, Bank Board member
By Krystof Chamonikolas and Peter Laca (Bloomberg 29. 1. 2024)
A Czech central banker said policymakers could consider accelerating the pace of interest rate cuts as inflation ebbs to “relatively standard” levels, the first monetary official to float a bigger move at next week’s meeting.
Tomas Holub, a member of the Czech National Bank’s rate-setting board, said options for the Feb. 8 meeting include cutting the benchmark by 25 or 50 basis points after policymakers began easing last month with a quarter-percentage-point cut to 6.75%, the first reduction in over three years.
“For me personally, the debate now will be about the pace,” Holub said in an interview in Prague on Monday. “I’m pretty open to discussing a 50 basis-point cut.”
The Czech Republic joined peers Hungary and Poland in loosening monetary policy after it fought back its worst cost-of-living crisis in three decades with a cycle of sharp tightening. The Czech National Bank expects that weak household demand, muted wage growth and fiscal restraint will help sap inflation to around the top of its tolerance range of 1% to 3% this month, down from a peak of 18% in 2022.
“The battle to restore price stability and reach our inflation target hasn’t been definitively won, but we’re approaching levels that can be considered relatively standard,” Holub, 49, said.
After six quarters of stagnation, the Czech Republic is the only European Union member state whose economic output has failed to recover to pre-pandemic levels. Even if central bankers opt for a bigger cut to the benchmark to 6.25% on Feb. 8, monetary conditions would remain restrictive, Holub said.
While the central bank’s forecast implies rates falling rapidly to about 3.5% at the end of the year, Holub said persistent price pressure in services and a potential rebound in home prices were lingering inflationary risks. Should they materialize, a more cautious approach could be warranted, he said.
The policy path also depends on the exchange rate for the koruna, which last week touched its weakest level against the euro since May 2022, trading around 24.80 to the euro on Monday. Holub, the central bank’s former chief economist, said pressure on the Czech currency was “temporary” and would probably abate when the European Central Bank pivots to easing.
“On the other hand, should the koruna weaken more significantly, say beyond 25 per euro, that might curb the pace of our interest-rate cuts, or even prompt a halt in the event of a major swing,” he said.
The koruna’s weakness was one reason why policymakers delayed the start of easing, along with concerns about pay demands among workers and the traditional January increase in the prices of goods and services. As a result, the rate path deviated from the central bank’s baseline projection, which implied the first cut in the third quarter of last year.
Since then, growth in salaries has turned out to be “surprisingly subdued,” while preliminary indicators suggest there will be “no drama” in inflation data for the first month of the year, due in mid-February, Holub said. He added that the focus would soon shift from 2024 to 2025, when he expects core inflation, a measure of underlying domestic demand pressures, to be “fully tamed.”
“It was legitimate for us to knowingly fall slightly behind the curve given the temporary uncertainty about wage growth, inflation expectations and the January repricing,” said Holub. “But with this uncertainty now diminishing, we should be ready to gradually catch up with the forecast.”