MNI INTERVIEW: CNB Likely Done At 3.5% - Ex-Governor Singer

The Czech National Bank has likely reached its terminal rate with the two-week rate at 3.5%, former governor Miroslav Singer told MNI in an interview, but more expansionary fiscal policy under incoming Prime Minister Andrej Babis is unlikely to add significantly to inflation pressures and force a hike.

“My major scenario is that the CNB has reached its terminal level. I don’t expect much of a need to hike soon,” Singer said. (See MNI EM CNB WATCH: CNB Holds Policy Rate At 3.5% As Expected)

The CNB left interest rates unchanged last week, with inflation close to the 2% target and expected to remain so next year, though the Bank said “relatively tight” monetary policy is still needed to counter increasing money growth, rising household demand, strong pay rises and elevated services inflation, as well as food price inflation.

“With services it’s quite obvious that risks are to the upside, and this also shows the strength of consumer demand. People are simply willing to pay more for services, which are being pulled up by strong wage growth,” Singer said. “The rest is mildly inflationary, but I wouldn't overdo it."

Labour markets are unlikely to ease dramatically, but wage growth should moderate as inflation holds steady and retail demand settles close to its current level, Singer said.

“The only major anti-inflation risk is the potential strengthening of the exchange rate, which I definitely would not rule out as a possibility.”

The CNB is “probably in a more hawkish mood than most observers,” Singer said, with even occasional comments about the possible need for future rate hikes more likely to translate into market expectations of stable rates.

If overall government expenditure were to increase by around CZK100 billion, as Babis has suggested, that is only the equivalent of 1.1-1.2% of GDP, Singer said. 

“And if the budget deficit does go up from two-point-something to three… well, that doesn’t sound to me like a recipe for disaster.”

Still, the CNB - led by former Babis adviser Ales Michl - may continue to warn of the inflationary dangers of fiscal policy, he said, as some Bank Board members seek to “educate” the new government.

“As the economy moves relatively close to full employment, any such impulse is quite unlikely to lead to an increase in GDP. Rather there will probably be some combination of a worsening of external balance, and at the same time, pushing up wages, and consequently, inflation. There's very little more that could be done in a situation like this. So there are inflationary consequences from fiscal policy, but they are very low.”