Interview of the Deputy Governor Tomáš Nidetzký
By Krystof Chamonikolas (Bloomberg 15. 6. 2022)
The Czech central bank’s hawkish wing is hoping to complete its yearlong crusade against inflation with one last big interest-rate increase before new management takes over, its outgoing vice governor said.
Tomas Nidetzky said in an interview that he expected the board to debate raising the benchmark to at least 6.5% at its June 22 meeting, from 5.75% now. It will be the last rate session for him, Governor Jiri Rusnok and another board member, all proponents of the rapid tightening campaign.
The central European country is grappling with 16% inflation, its fastest in three decades, driven by a combination of surging global commodity prices and domestic pressures from overheated labor and property markets. The Czech National Bank must do more to cool the economy, even as declining real incomes are likely to eventually undercut consumption, Nidetzky said.
“I can easily imagine a 75 basis-point hike,” the 52-year-old economist said at his office in Prague. “We could even do a bit more if we conclude that the inflationary pressures are persistent.”
That size of an increase may roughly split the difference between the central bank’s baseline and alternative forecasts for market rates as measured by the Pribor interbank rate, a proxy for the benchmark. It may also suffice to return inflation to the 2% target in about two years, Nidetzky said.
“We have found the baseline scenario too aggressive and have opted instead to smooth out the rate path as implied by the alternative scenario,” Nidetzky said. “We have done most of the heavy lifting.”
Still, he said faster-than-expected inflation combined with a weak koruna and fresh price pressures from abroad mean more tightening is needed, after a cumulative 550 basis points so far. A hike now could also put the three policy makers joining the bank on July 1 into a “more comfortable situation,” he said.
Last month, the koruna plunged, triggering a market intervention by the central bank, after President Milos Zeman named Ales Michl, a board member who had opposed all hikes over the past year, as the next governor. Zeman later made three more board appointments that were seen as weakening the 5-2 majority that has consistently voted for tightening.
The Czech currency has also been under pressure from the war in Ukraine, expected monetary tightening in the US and the euro area, and a shortage of chips that’s hurting the country’s key manufacturing industry. Traders at the central bank still have an active mandate to step in whenever needed to stop undue koruna depreciation, according to Nidetzky.
While Czech central bankers were among the first in the world to warn against persistent inflation and to start tightening policy, the vice governor says that, in hindsight, even earlier and faster rate hikes were needed.
The government has also been slow to curb pandemic-era budget spending, and the lowest unemployment rate in the European Union is forcing companies to raise salaries rapidly to hire and retain workers.
And despite arguments from Michl that rate hikes won’t help because price growth is fueled by outside factors, Nidetzky said the overhaul of the bank’s board doesn’t mean its policy will fail. Even under new leadership, the newly constituted board “will simply have to react” if faced with additional inflationary pressures, he said.
“While I don’t mind reaching our 2% target later, I want to make sure that inflation next year will no longer be the big driver of wage negotiations that it is today,” said Nidetzky. “I wish and hope that inflation will ease soon and our new colleagues will eventually be able to start cutting rates.”