MNI INTERVIEW: CNB Hold Seen, But Hike Likely To Be Discussed

The Czech National Bank will leave interest rates unchanged at 3.5% next week, but it will be unwilling to allow inflation to rise above 2% and the chances of a hike will grow the longer the Iran conflict persists, ex-governor Miroslav Singer told MNI.

Singer said it was still too early to estimate the impact of spikes in the prices of oil and gas on the Czech economy in the near term, though it will be “relatively negligible” in the near term.

“You wouldn't expect to see major second-round effects, and despite what the headlines say regarding gas storage in Europe being at only around 30% of capacity, that’s higher than it normally would be at this time of year,” he said in an interview.

"In addition, the outcome of the Russian crisis is that there are a lot of ports capable of taking on LNG if need be. I'm not saying it's going to be easy, but at the same time, it's only a fraction of the total gas consumption that goes through the straits. From our side, there are also pipelines and spare capacity." 

Even had international events not intervened, any discussion of rate cuts would likely have been derailed by last week’s Q4 2025 real pay growth data, which came in at 5.1%, versus market expectations of 4.7%, Singer said.

"Observing current oil price increases, I would not be that surprised that in case these trends are going to continue they are going to discuss the hike next Thursday. I am not saying they hike, but the discussion would not be a surprise,” he said.

KORUNA WEAKENING

Talk of rate hikes could gain prominence should inflation - 1.6% in January - exceed the Bank’s 2% target, though Singer noted that while up to one percentage point in extra inflation could be added this year in the event of a longer conflict, it would be accompanied by a downgrade to GDP growth.  (See MNI EM INTERVIEW: CNB's Next Move Could Be A Hike - Ex-Advisor)

“Looking ahead, if they feel that there is going to be a more sustained inflationary impact, then they could be less tolerant than one might expect, if only because the last time we saw something similar - when Russia invaded Ukraine - inflation quickly became a supply-side phenomenon, with inflation going close to 20%. I would therefore expect them to be less tolerant of any above-target increase.”

The Czech koruna has weakened somewhat against the euro since the U.S.-Israeli attack on Iran, though his may be in line with what the Board wants, Singer said.

“The structure of inflation is still being driven down by food and energy prices, and, in particular government policy, which has pushed wholesale energy  prices down. 

“The only reason why there could be a stronger downward pressure on the koruna would be portfolio adjustment, given that events in the Middle East may have a stronger impact on some other central European or emerging market currencies, which wouldn't be that surprising. If that were the case, then the central bank has the reserves to cope.”