Czech central bank chief sees weaker recovery as rate hike debate looms

Interview of the CNB Governor Jiří Rusnok
By Robert Müller (Reuters 21. 4. 2021)

The Czech National Bank will have to factor in slower economic growth this year as it begins to weigh, probably from August, whether and when to raise interest rates, its governor Jiri Rusnok said in an interview.

The Czech central bank is tipped by markets to be the first in Europe to reverse the policy easing undertaken when the COVID-19 pandemic struck more than a year ago. Forward rate agreements have priced in a rate hike in six months' time.

The central European country has been badly hit by the pandemic and has the world's worst per capita death toll.

High infection rates prompted extended lockdown restrictions that Rusnok said would mean a downgrade to the bank's 2021 growth forecast of 2.2%, though he gave no new estimate.

"I see some slowdown this year, caused by the extended restrictions and limits and complications in the international environment, connected mainly to supply chains disruptions," Rusnok told Reuters in the interview, conducted on Tuesday.

Rate setters have said they will not rush to lift the two-week repo rate from 0.25% - where it has been since May 2020 after 200 basis points in cuts - to avoid undermining an economic recovery.

Rusnok said a hike was not on the cards at the next policy meeting on May 6, when new staff forecasts will be available. Another outlook update comes in August, when Rusnok said a policy debate may start.

"I see it as more likely with the August forecast (update), when we will have more certainty in terms of the monetary policy horizon," he said.

Infaltion bump

But Rusnok said he could not yet predict if the bank would deliver zero, one or two hikes this year or whether it would consider any moves larger than a standard 25-basis points rise.

The bank's February outlook signalled as many as three hikes in 2021.

Inflation, at 2.3%, has picked up after easing to the bank's 2% target.

Pressures remain with low unemployment and a record income tax cut this year that boosted paychecks, although Czechs have been unable to spend much as shops and restaurants have been closed almost continuously since October.

While COVID-19 cases have slowed, the government will likely move slowly with re-openings.

Rusnok said inflation would probably jump when shops reopen, but people would not necessarily spend all their "forced savings", choosing instead, for example, to reduce debt.

Inflation may near the upper limit of the bank's 1-3% tolerance band around the target within a few months "but for the whole year, price growth should be between 2% and 2.5%".