Interview of Jan Kubíček, Bank Board Member
By Krystof Chamonikolas and Peter Laca (Bloomberg 25. 10. 2023)
Czech central banker Jan Kubicek said he may consider an interest-rate cut next week, although lingering inflation risks still give him pause.
In an interview on Tuesday, Kubicek said his decision will depend on a review of fresh forecasts and a discussion with his colleagues on Nov. 2. The board is coalescing around the view that the initial steps should be small and gradual, he added.
“The risks are so conflicting that I don’t know yet how I’m going to vote next week,” Kubicek, a member of the seven-person rate-setting body, told Bloomberg. “Once we start, I believe we’ll be able to deliver continuous, gradual easing, unless some unforeseen circumstances occur.”
Policymakers in Prague are discussing when to begin easing after the highest rates in almost a quarter-century curbed lending and helped inflation retreat to single-digit territory. In the process, they need to weigh a stagnant economy against potential inflation flareups stemming from one of the lowest unemployment rates in the European Union and a weaker-than-expected koruna.
Money-market investors are betting on a quarter-point reduction at each of the next two meetings, in November and December.
Staff forecasts will likely show a worsening outlook for the Czech economy because of weakness in Germany, its biggest trading partner. Meanwhile, budget cuts may shave more than 1 percentage point off gross domestic product growth next year, according to Kubicek.
Consumer-price growth has been easing slightly faster than the Czech National Bank expected, and is projected to drop to a 2% target next year from a peak of 18% last September, according to central bank forecasts.
Still, 47-year-old Kubicek said core inflation, which reflects underlying demand trends, would likely remain elevated – and labor unions might cite companies’ strong profitability as a reason to push for higher pay next year.
‘On the ambitious side’
“That is an extra argument for caution for me,” he said. “I personally regard core inflation trends as a more important indicator.”
Even if the fresh forecasts and the board discussion show November as the optimal time to start monetary easing, a potential decision to hold off until December “wouldn’t be a serious mistake,” Kubicek said. While a delay of the first rate cut until early 2024 couldn’t be ruled out, that may increase the need for bigger steps later on, which Kubicek said “would be less comfortable” for him.
Market expectations for a total of about 275 basis points of policy easing by the end of next year are “on the ambitious side, but I don’t want to say it’s impossible,” he said. The board will take into consideration the worsening trends in the country’s current-account balance and its impact on the koruna, according to the policymaker.
“Those are fundamental reasons why the exchange rate might be weaker than we originally thought, and that of course does some of the monetary-easing work for us,” said Kubicek.