Interview of Marek Mora, Deputy Governor
By Krystof Chamonikolas and Peter Laca (Bloomberg 18. 1. 2023)
Czech policy makers should raise interest rates further to cool the overheating labor market and underscore their commitment to fighting inflation, according to the central bank’s outgoing vice governor.
Consumer price growth will slow after peaking this month, but domestic pressures stemming from the European Union’s lowest jobless rate are likely to persist and may delay a return to the 2% inflation goal, Marek Mora said in an interview. He has pushed for monetary tightening since mid-2021, even after a dovish overhaul of the board last summer halted rapid rate hikes. By contrast, the bank’s new leadership is betting that borrowing costs are high enough and that declining real incomes and household consumption will help end the worst cost-of-living crisis in three decades. Still, the majority of board members, including Governor Ales Michl, have said more tightening might be needed if wage demands are too large and spending jumps again. “Headline inflation will ease relatively quickly this year to single digits – but I am rather skeptical that we will be able to reach the 2% target quickly enough without further monetary tightening,” said Mora, whose single six-year term ends after the Feb. 2 policy meeting.
He said labor-market resilience in the Czech Republic and Germany is “a bit of a mystery” given expectations of a mild recession, and it will remain a source of inflationary pressure. While the Czechs aren’t in a full-fledge wage-price spiral, the economy is “on the verge” of one and policy makers should act now to avoid it, he said. “I believe the risks of tightening policy further now are smaller than the risks of losing control and suddenly having a double-digit jump in wages, for example,” Mora said. “Monetary policy should act preemptively to cool the labor market and preclude such elevated wage demands.”
Higher rates would also allow the central bank to scrap a pledge made last May to intervene in the market against any excessive koruna depreciation, according to Mora. Besides being no longer needed – the latest data showed zero interventions in November – the currency regime is making monetary policy less transparent, distorts the market and could attract unwanted capital inflows, he said.
Mora and board member Tomas Holub have been unsuccessfully lobbying the policy panel to resume tightening by pointing to the central bank’s staff forecast implying higher borrowing costs. But the other five policy makers have preferred to smooth out the rate path and keep the benchmark at the current 7% for longer.