Marketa Fiserova, Yon Pulkrabek (Feb. 26 2008, Bloomberg)
The Czech central bank may need to raise interest rates as accelerating inflation puts pressure on wage growth, central bank board member Pavel Rezabek said.
There are signs that the fastest inflation in nine years may encourage unions to demand higher pay and be successful at a time the country enjoys the lowest unemployment rate in a decade, he told journalists in Prague.
``I can't see a great need to move with rates in the nearest future,'' Rezabek said after a press conference today. ``However, pressures on the labor market would be an impulse that we will have to quickly assess and react to because this is what represents the threat of accelerating inflation.''
The central bank on Feb. 7 raised the European Union's lowest rates for a fifth time since May to help bring the inflation rate, at 7.5 percent in January, to its 3 percent target by next year. Inflation accelerated more than forecast amid a combination of factors that are hard to predict and are mostly beyond monetary policy makers' control.
``What is unpleasant at the moment is food, energy and rents,'' Rezabek said. ``If this spurs the desire for wage growth, a rate increase can easily occur in a relatively short period of time.''
Staff Rate Prediction
Three weeks ago, Rezabek was one of two board members voting against a rate increase. Today, he cast doubts on the central bank's staff projection of anticipated interest rates, which suggest cuts in borrowing costs to begin this year.
Information in the central bank's staff rate prediction, which is non-binding for the board and was published for the first time this month, is rather ``inconsistent,'' he said. ``It doesn't seem very likely to me that in such a short period of time, there could be such a major decline in interest rates.''
Turbulence on global financial markets prompted investments in the Czech koruna, making it a ``safe haven,'' because of the healthy state of the domestic banking industry, Rezabek said. He said it's difficult to predict when the koruna would weaken.
``If the nervousness on the global markets persists, the koruna will remain attractive,'' he said. The koruna appreciated 15 percent against the euro over the past eight months and was the world's best-performing currency during that time.
Koruna Trading
It was trading at 25.017 against the euro as of 1:51 p.m. in Prague, compared with 24.968 in yesterday's late trading. The currency's gains cap inflation not only by reducing import prices but also by curbing the economic expansion because it undermines exporters' koruna revenue.
It's necessary to wait for the final outcome of the global financial crisis and the effect of the strengthening koruna on Czech economic growth to decide what to do with rates, according to the policy maker.
Still, he said the next change may be a cut, warning against an increasing risk of a faltering global economy as a result of the financial turmoil.
A prospect of ``the Czech economy's slowdown'' toward as low as 4.5 percent this year from a record 6.6 percent in 2007, is ``quite significant,'' he said. With ``the non-inflationary growth'' estimated at about 5.5 percent, we may be able to find the current setting of ``monetary policy as rather restrictive.