Czech central banker Benda says rates may rise faster than bank's outlook this year

Interview of Vojtěch Benda, Bank Board member
By Robert Müller (Reuters 23.  7.  2021)

The Czech National Bank may raise interest rates faster this year than projected in its spring forecast and could consider a larger than standard 25-basis-point hike at the Aug. 5 policy meeting, board member Vojtech Benda said on Friday.

The central bank raised its main two-week repo rate by 25 basis points to 0.50% at the last policy meeting on June 23, becoming among the first in Europe to tighten policy as economies recover from the COVID-19 pandemic.

The bank's forecast, which is a guide for rate-setters, flagged three hikes between June and December as the domestic economy is rebounding and current and projected inflation is above the central bank's 2% target.

Benda said the next forecast due out at the August meeting could see faster rate growth.

"It can be expected that the inclusion of new information will most likely be reflected in the forecast as a need for faster growth of interest rates," he told Reuters in an interview.

That would set the Czechs further apart from the European Central Bank, which has pledged to keep rates at record lows until it sees inflation reaching its 2% target "well ahead of the end of its projection horizon and durably".

Benda said a widening rate differential with the ECB did not worry him because markets seemed accustomed to the Czech central bank acting independently.

The Czechs are not alone in central Europe in taking a tightening course, with Hungary likely to hike again next Tuesday after its central bank delivered the EU's first rate rise in June.

While Czech central bank Governor Jiri Rusnok has said that a standard rate hike could come at each of 2021's remaining four policy meetings, Benda anticipates bolder action.

"Given that economic development shifted significantly rather towards the pro-inflationary risk, I can imagine a stronger rate hike at the next meeting but that will come out of the debate," Benda saids.

"I can imagine (myself) proposing again a stronger hike than 25 basis points."

Benda voted alone among the seven bank board members for a 50-basis-point increase at the last meeting in June.

Although headline inflation eased to 2.8% in June, it remained in the upper half of the central bank's tolerance band, set at 1 percentage point around its 2% target.

Global fuel and materials prices have been an inflation driver, but so are pressures from the end of pandemic lockdowns and a re-emergence of labour shortages as industry accelerates.

Benda said that the willingness of some central banks to tolerate temporarily elevated inflation seemed risky.

"From anecdotal evidence, I feel the risk of untangling of inflationary expectations. Hence our approach is preventative, we don't wait for that to happen," Benda said.