MNI EM INTERVIEW: Czech Nat'l Bank Risks Lagging Prices Bounce

The Czech National Bank risks having less time than it anticipates to raise interest rates and avoid acting late to an already “inflationary cocktail,” one that could be made worse by fiscal loosening following October’s general election, a former top CNB economist told MNI.

“The pressure on the CNB to start hiking interest rates could come earlier than they appear to have expected,” ex-CNB chief economist Petr Kral said in an interview.

“At the same time, I think that they will need more evidence and more time to realise this, because this Bank Board is not very keen on making quick adjustments to monetary policy. They need to wait for a relatively longer time to do anything with monetary policy,” he added.

Headline inflation fell to 2.5% and core inflation to 2.8% in August, with policymakers again opting to leave the key 2-week repo rate unchanged at 3.5%. That left policy “marginally restrictive,” Kral said, in part due to the recent pace of koruna appreciation against the euro and the US dollar.  (See MNI EM CNB WATCH: 2W Repo Rate Held At 3.5%, Decision Unanimous).).

The Board said the outlook was “inflationary overall”, citing upside risks from consumer demand, pay growth, sticky services inflation, rising property prices and imputed rents, and food prices.

TIMING

While August’s announcement makes the direction of future policy decisions clear, CNB Board members have so far given little forward guidance on the timing of a hike, although Kral thinks the risks are plain to see.

He anticipates both overall and core inflation could “very easily be above 3%,” converging over the remainder of this year and into next as the positive effect of lower energy and fuel bills declines.

But before acting, the CNB Board “will need to see headline inflation going above the upper boundary of the tolerance band, which is not very likely until the end of the year, because of some base effects, and because of the fact that there are still some restrictive effects of the previous, tighter monetary conditions in the pipeline,” Kral explained. 

That could possibly arrive at the beginning of next year, when, “simultaneously the policy horizon will shift to 2027 and the possibility of a very expansionary turn in fiscal policy,” said Kral, now an economic commentator for 11am Newsletter.

EMISSIONS PRICING

The CNB will also have to decide how much of the price effect of new EU carbon emissions trading rules, set to come into effect in 2027, it is willing to tolerate, he said.  (See MNI SOURCES: Doubts Over EU Carbon Pricing Key For ECB Rates)

“Monetary policy does not usually react to primary changes in indirect taxes of this nature; rather it focuses on any potential negative secondary effects. However, with inflation expectations already not fully anchored, certainly not compared with pre- Covid times, the CNB cannot be as firm in its belief that the second-round effects of such a relatively huge change in energy policy will not be dramatic."

Ultimately, the outcome of this “potentially highly inflationary cocktail” will depend very much on how the central bank communicates, and whether or not it can react in a forward-looking manner, Kral said.

“This is something of which I do not believe the current Board is very well aware, based on its track record, and because it’s ultimately much easier to sound cautious and hawkish when you are easing than it is to be decisive when you have to raise interest rates.”