Czech central bank governor prepares for interest rate hikes

Interview of the CNB Governor Jiří Rusnok
By Andrew MacDowall (The Banker 16. 6. 2021)

Czech National Bank governor Jiri Rusnok on a difficult past year and balancing the country’s obligation to join the eurozone with its traditionally eurosceptic politics.

Jiri Rusnok started his six-year term as governor of the Czech National Bank (CNB) in 2016. A former minister of finance and of industry and trade, he also served as prime minister in 2013-14, as head of a caretaker government. He now oversees a central bank known for robust adherence to its price stability mandate, as well as ground-breaking countercyclical monetary policy.

How did the Czech banking sector fare in 2020?

The banking sector started with relatively high capital adequacy before the Covid-19 crisis, and banks have managed to maintain their strong positions very well despite a difficult year for the economy. Of course, there was a certain increase of impairment and losses, and a decline in net interest income, but despite that, the sector reported solid profit at around Kcs48bn ($2.3bn). This was down 48% on 2019, but one should take into account that the previous years had seen historical highs in profit in the Czech banking sector.

The capital adequacy ratio is still at a very high level. At the end of 2020 it reached 22.7%, up 2.8 percentage points, and one of the highest levels in the EU. The strength of the banking sector is one of the big advantages that the Czech economy has in preserving the economic equilibrium.

The CNB has a reputation for being hawkish on inflation. How will it balance the need to restrain inflationary pressures with the economic recovery?

We are a monetary authority first, but at the same time we are the supervisory authority and the macroprudential authority, all under one roof. We have to balance all our decisions very cautiously to avoid any damaging impact. Nevertheless, the price stability mandate is at the core of our mandate. Inflation is here, and consistent with our forecasts, we expect the next move will be a raise in interest rates around the middle of the year. We are preparing ourselves and the market for hikes.

We consider these steps very cautiously regarding the balance with the economy’s recovery, but at the moment our analysis says that we are in a lively recovery phase, and in the second half of the year we’ll see a significant rebound of economic growth. We are even more optimistic for next year. I don’t see a conflict between the goal of economic recovery and our primary target of price stability.

What is the outlook for Czech membership of the eurozone?

We are a mid-sized, open, export-oriented economy, an EU member and very deeply integrated with the eurozone in trade terms, but nevertheless outside it. We have to take all these factors into account. Currency flexibility supported our efforts to relax monetary conditions in early 2020 and now is helping us in the fight against current inflationary pressures.

We were a rare case in Europe in that we had room for policy manoeuvre to cut rates significantly. Our long-term experience with an independent currency is essentially positive. We haven’t had any problems managing our own monetary policy, and as long as our monetary policy is trusted by the markets, we can continue to live comfortably.

Membership of the eurozone is a purely political question, depending absolutely on the government, and we must respect that. There has been a broad consensus so far among those in political power that we will not join the eurozone in the short term, though this may change in time. The CNB is basically the technical agent as regards to this topic.

Our role is to be ready from a technical point of view – we are trying to remain consistent with the legal and technical conditions. We are more or less ready in this respect, with no significant obstacles. We are not an active supporter of eurozone membership, or vice versa – we try to be a neutral authority in this respect.

What changes do you expect in the banking sector over the coming years?

We will follow the implementation of the full Basel framework inside the EU, and I don’t see any specific challenges for Czech banks, which are very well prepared to fulfil all the criteria. But we would stress, in some specific cases, the concept of proportionality, because in the case of some of our banks, it doesn’t make sense to put very strict rules on them that are intended to regulate the big global players. Banks are being pushed to prioritise technological development by tough competition in a relatively small market, and there are many cases of banks acquiring fintechs or setting up fintech companies. What we’re trying to do is maintain a level playing field for all market participants.