Interview of the Deputy Governor Tomáš Nidetzký
By Luke Heighton (MNI 19. 11. 2021)
The Czech National Bank will look to raise interest rates in December 2021 and February 2022 then only fine-tune the tightening cycle begun in June, Deputy Governor Tomas Nidetzky told MNI in an interview.
Labour shortages will put continued pressure on inflation next year, Nidetzky said, but consumer spending could moderate, amid a "perfect storm" of sluggish growth and rising inflation caused by the Covid-19 pandemic.
"We will also have to increase our rates at our December meeting. By how much depends on the situation. But I wouldn't expect to see as big a hike again as we did during our last meeting at the beginning of November," Nidetzky said. "We will tweak our decision in December and at the following meeting in February, so we wanted to step up the level of our two-week repo rate, and then wait for transmission by all channels and then proceed with only possible fine-tuning."
The CNB surprised analysts on Nov. 4 with a 125bps increase on the two-week repo rate, to 2.75%, while the discount rate and the Lombard rate were raised to 1.75% and 3.75%. Inflation 0.3 percentage point above CNB autumn forecasts and on course to hit 7% by year's end convinced a majority of member of the need to reach the neutral rate of interest between 2.5 and 3% as quickly as possible, Nidetzky said.
Supply bottlenecks and demand spikes are both driving prices higher, Nidetzky said, Fiscal consolidation in 2023 plus monetary tightening should ease some price pressures, but most Board members expect bottlenecks to persist.
"What bottlenecks are currently affecting economic activity in the Czech Republic? It's not the number of orders and foreign demand; it is labour shortages. This is the narrowest bottleneck, as well as all the impacts arising from logistics and transportation problems. So, if there is an economic slowdown, we believe that it will not be driven by external factors only," he said.
Far from receiving a boost from the release of pent-up savings, household demand should fall next year as inflation and fuel costs bite and monetary tightening takes effect, Nidetzky said.
With the Czech koruna weak against the dollar, the CNB is unlikely to get any help from the exchange rate channel over the forecast horizon, he said. "It will depend heavily not only on the ECB, but above all on the Fed. If the Fed decides to tighten, it will definitely have a depreciating effect on the koruna and other emerging markets' currencies.
"We don't target FX - this is something that is outside of our sphere of influence - but it can provide very good guidance as to what we are going to do because if there is no appreciation, it's obvious that we will have to respond more via our interest rates."
Czech banks, holding over a third of government bonds, are sufficiently profitable and well-capitalised to withstand rate increases, Nidetzky said.
However the inversion of the 2Y-10Y yield curve could signal an increasing probability of a reversal of the business cycle in 6-12 months' time, he added.
Asked about a pre-October general election row between CNB boss Jiri Rusnok and Finance Minister Alena Schillerova in which Schillerova took complained about recent rate rises, Nidetzky was staunch in his defence of central bank independence.
"At the Czech National Bank we understand that even though fiscal policy is in our sphere of interest, it is not within our sphere of influence. And it is clear that the same is true for politicians in the case of monetary policy," Nidektzky said. "Celebrating the anniversary of the Velvet Revolution in the Czech Republic these days reminds me that the essential pillars of democracy are the independence of the courts, the press and the central bank. This is what we all should bear in mind."