Interview of Marek Mora, Deputy Governor
By Krystof Chamonikolas and Lenka Ponikelska (Bloomberg 19. 3. 2019)
The Czech central bank will probably keep interest rates on hold next week, as worsening data from abroad cloud the outlook for the export-oriented economy, Deputy Governor Marek Mora said.
Policy makers in Prague, who led Europe with a record five rate increases last year, are meeting March 28 to weigh whether further monetary tightening is warranted. Rapid wage growth and a weak koruna are generating domestic price pressure, but these are largely outweighed by a string of downward revisions for economic growth in the euro region, the Czech Republic’s main trading partner, Mora said in an interview.
“I see the Czech National Bank’s existing assumption of zero to one rate increase this year as the most likely scenario, and I don’t think that one potential hike will happen at the next meeting,” Mora said Monday.
His dovish view follow comments by Governor Jiri Rusnok, who told a magazine last week that the bank doesn’t know how long or how deep the Czech economic slowdown will be. Others on the seven-member policy board have sounded more upbeat this month, with Tomas Holub seeing room for up to two rate hikes in 2019 and Vojtech Benda saying he can imagine up to three. “I’m among those advocating a more cautious approach,” said Mora, “I don’t want to raise interest rates until I have more clarity on whether we’re currently experiencing a mere slowdown and returning to some healthy, sustainable growth, or if it’s early signs of a future recession.”
Money-market investors scaled back bets on an imminent Czech rate hike after the European Central Bank cut its forecasts on March 7 and postponed plans for the start of its own policy tightening. Forward-rate agreements still indicate at least one quarter-point increase this year of the Czech benchmark, now at 1.75 percent. The monetary authority’s longer-term goal is to reach what it calls a neutral interest rate of around 3 percent.
The euro area’s worsening outlook and its prolonged period of ultra-low rates are making it harder for the Czechs to resume tightening despite faster-than-expected inflation in the first two months of the year.
Mora said he “wouldn’t overestimate” the February inflation data because the central bank is targeting 2 percent price growth 12 to 18 months from now, by which time its projections assume a significant cooling of the economy. While the koruna may appreciate less than the monetary authority predicts, that would help offset global headwinds and wouldn’t automatically trigger a policy response, he said.
“The current forecast may be slightly optimistic and the real developments may be worse than projected, in which case the weaker koruna is merely compensating for that deterioration and isn’t a reason to tighten policy,” he said. “I won’t try to push rates up to some neutral level at any cost if it’s going to knock inflation below the target.”