Interview of the Vojtěch Benda, Bank Board member
By Kryštof Chamonicolas and Lenka Ponikelska (Bloomberg 28. 1. 2020)
The Czech Republic may lose some of its ability to steer inflation if it doesn’t raise interest rates in response to a surge in consumer prices beyond official targets, according to one central-bank board member.
While the U.S. Federal Reserve and the European Central Bank are renewing monetary stimulus, the eastern European country is leaning the other way to cool its fastest inflation in seven years.
After eight hikes in borrowing costs since 2017, the Czech National Bank has held fire for five meetings to asses risks to the export-oriented economy. The pause has come even after internal forecasts implied that there’d be two increases by the end of the first quarter.
Vojtech Benda, who unsuccessfully sought higher rates at the last three meetings, says a more pro-active approach is needed. Risks from Brexit and global trade have receded, while record-low unemployment will stoke Czech wages and consumer prices, he said Monday in an interview.
“For inflation to return to the 2% target, our monetary policy must be tighter,” according to Benda, though he said he’s yet to decide how to vote at the next meeting, on Feb. 6. “Our job is to smooth out inflation, not interest rates. I don’t think we can return to the inflation target by doing nothing at all.”
Several board members have indicated they expect a balanced debate next month on whether or not to resume rate increases. While the koruna’s 0.8% appreciation against the euro since the bank’s December meeting could be an argument to hold rates, a spike in inflation to 3.2% last month -- above the 1%-3% tolerance range -- could bolster calls for a hike.
For Benda, there’s a risk that central-bank inaction on currently elevated consumer-price growth could eventually boost inflation expectations. The future direction of monetary policy will also depend on the results of upcoming wage negotiations as a prolonged period of faster inflation could embolden workers’ demands.
Benda’s comments contrast with the view of fellow rate setter Ales Michl, who said last week that the bank should refrain from hikes to avoid stifling manufacturing, the lifeblood of the economy. Underscoring the bank’s dilemma, Governor Jiri Rusnok said this month that rates will probably stay unchanged in 2020, but signaled a small increase is possible.
Benda rejects the preference of some board members for stable interest ratesto avoid a cut in the second half of the year, which was indicated in the bank’s most recent forecast. The 44-year-old economist said he doesn’t mind reversing increases later if necessary.
“A possible rate hike in February obviously won’t fix the elevated inflation levels now and in the next few months,” he said. “But it should support a faster return of inflation toward the target on the monetary-policy horizon.”