Interview of the Deputy Governor Marek Mora
By Jan Lopatka (Reuters 25. 4. 2019)
Czech central bank Deputy Governor Marek Mora is ready to back a 25-basis-point increase in interest rates at next week's monetary policy meeting if new economic forecasts support further tightening, he said in an interview.
With price pressures still coming from the growing domestic economy, Mora could be the swing vote in favour of an increase that would bring the two-week repo rate to 2.0 percent for the first time in a decade.
The bank's seven-strong board meets on May 2, when a new quarterly staff forecast will be available. The bank raised rates five times last year but paused in December as it weighed a slowdown in Europe against the strong domestic economy.
"For me personally, the calculation turns out slightly in favour of raising interest rates," Mora said on Wednesday.
"If the new forecasts proposes that, I will be in favour, although Im probably more than some others, perceive the risk that the development abroad can affect us faster and harder than the model assumes."
Two board members, Vojtech Benda and Ales Michl, have voted for an increase at the most recent meetings. Another rate setter, Tomas Holub, told Bloomberg last week he believed there was room for an increase in the first half, which will include one more meeting, on June 26, after the May sitting.
Governor Jiri Rusnok said in an interview for ekonimckymagazin.cz released on Wednesday the bank remained on a "thin edge" between stable rates and an increase going into next week's meeting.
Of the seven rate increases in a cycle going back to 2017, five came at meetings where a new forecast was discussed.
Czech inflation reached a six-year high of 3 percent in March, the top of the bank's plus or minus 1 percentage point tolerance band around its 2 percent target.
"Inflation is a bit higher than we had expected, especially core inflation. That is related to the still 'pressurised' labour market, wage development and private consumption," Mora said.
The crown's exchange rate has kept underperforming the bank's outlook, he said, another pro-inflationary factor.
A new risk was growth in oil prices, combined with the strength of the dollar which translated into more cost growth in crown terms, he said.
Downside risks came from the global economy, Mora said, where a slowdown was hitting especially Germany, the Czech Republic's main trading partner.
A delay in expected policy tightening by the European Central Bank was also an anti-inflationary factor, and Mora said he was cautious about the chances of any further tightening in the rest of the year.
He said in view of the crown's past underperformance compared with its forecast path, the bank would present the results of an upgraded forecasting model as an alternative scenario to its baseline forecast after the meeting next week.
The upgraded model would see a different setting of equilibrium foreign interest rates and the Czech Republic's risk premium and would show a lower impact of the interest rate differential versus foreign markets, he said.
"All other things being equal, when you have a more moderate firming of the crown, then the interest rate trajectory should come out slightly higher," he said.
The bank will eventually switch to the upgraded model for its baseline forecasts when it is happy with its performance, he said.