Interview of Jan Frait, Bank Board member
By Krystof Chamonikolas (Bloomberg 26. 7. 2022)
The Czech Republic must show caution with potential further monetary tightening, because the domestic and global economies are slowing, one of the central bank’s three new board members said.
Interest rates are already high enough to curb lending, consumption and investment, Jan Frait told reporters in his first media appearance after starting his term this month. While inflation is set to accelerate in the coming months to around 20%, it’s likely to peak this fall and the central bank should adopt a more forward-looking view at its next policy meeting on Aug. 4, he said.
“I will be deciding between rate stability and a potential slight increase,” Frait said on Monday. “The signals that have been coming over the past weeks are rather suggesting we should be cautious about further hikes.”
Surging global energy costs and pressures from overheated Czech labor and property markets pushed consumer price growth to 17.2% last month, the fastest in three decades. At the same time, the economy is projected to be undergoing a mild recession as shortages of everything from chips to workers are causing disruptions in the key manufacturing industry.
The central bank has raised its benchmark by 675 basis points over the past year. The last move was a 125 basis-point hike in June, just before President Milos Zeman, a critic of the aggressive tightening campaign, overhauled the board by replacing members who had backed the increases.
Frait was previously the chief of the bank’s financial-stability department, and earlier served on its policy board from 2000 to 2006.
He said he wasn’t opposed to the central bank’s recent practice of selling foreign reserves to prevent koruna depreciation, as long as the intervention is “relatively temporary” and doesn’t create the perception of a commitment.
The 56-year-old economist also said he was “an advocate of relatively tighter monetary policy over a longer period” and that in the coming years he would like to see rates higher on average than in the previous decade.
He favors targeting inflation at a more distant horizon than the standard 12-18 months to better reflect longer-term factors such as lending standards and asset prices, which are harder to capture by existing forecasting models. Such an approach would allow the central bank to hike rates less aggressively now and also lower them more slowly in the future, according to Frait.
“It means we wouldn’t go from one extreme to another,” he said. “Our current monetary policy is already rather restrictive.”
That view resembles the central bank’s so-called alternative scenario, which assumes policy makers will refrain from further tightening and inflation will only reach the 2% target in two years.
According to Frait, both the domestic and global economies have “shifted significantly toward the recession scenario.” Still, Czech consumer demand and price pressures might prove to be more persistent than currently assumed, which could warrant further tightening, he said.
“The situation may obviously change,” Frait said. “I’m definitely not ruling out that rates could keep rising, whether now or in the near future.”