By Peter Laca (Bloomberg 21. 3. 2018)
After three interest-rate hikes and the world’s best currency rally over the past year, the Czech central bank can now rest until euro zone monetary policy starts moving in the same direction, according to Deputy Governor Vladimir Tomsik.
The Czech economy is growing across all of its segments, pushing the jobless rate to record lows and driving salaries higher. It’s only a matter of time when this will translate into stronger pressure on consumer prices, Tomsik, 43, said in an interview on Tuesday. That puts the bank in a good position a year after it ended a Swiss-style cap on koruna gains and reverted to standard tools -- interest rates and currency moves -- to calibrate policy.
After becoming Europe’s first country to raise borrowing costs last year and watching the currency jump 6 percent against the euro, Tomsik said he didn’t see any reason now to hike again before the end of this year or in early 2019, as indicated in the bank’s forecast. While inflation slowed more than expected in February, the economy running is in line with the outlook, and the three rate increases since last year have combined with koruna gains to deliver the equivalent of as much as 2.25 percentage points in rate hikes, he said.
“We have already done a lot of work on the path to normalize monetary conditions,” he said. “I personally believe we can afford a bit of a timeout now. This would allow us to wait for better harmonization with the monetary policy of our main trading partner.”
Swifter Move
Rate setters in Prague are watching for clues on when their counterparts in Frankfurt will phase out the European Central Bank’s unconventional easing policy. The Czech National Bank wants to avoid widening the gap too much between its interest rates and borrowing costs in the euro zone, as that could trigger excessive koruna appreciation.
There should be room for a “swifter move upward” with Czech rates next year when a less-relaxed ECB policy is expected, Tomsik said.
The ECB moved closer to scaling back unprecedented monetary stimulus this month, when policy makers unanimously decided to drop a pledge to step up asset purchases if needed. Bond buying is widely seen as ending this year, and financial markets are bracing for a rate increase in the euro zone sometime in the middle of 2019.
“As a small and open economy, we can’t ignore the fact that if you start raising interest rates, it will clearly affect the exchange rate,” Tomsik said. “It’s clear that the ECB will continue with its loose monetary policy for some time. This is creating appreciation pressure on the koruna, and that’s effectively slowing the pace of our interest-rate increases.”
The economy is also limiting chances for Tomsik to back a rate hike, as his last regularly scheduled policy meeting will be in November. His term on the board will end the following month.
“If our forecast continues to materialize as is happening now, then it might be possible that I will not vote on another rate increase by the end of my mandate,” he said.