MNI INTERVIEW: CNB May Look Through Sub-Target CPI- Kral
The Czech National Bank is likely to leave policy unchanged for some time even if inflation falls below target this year, though this might prompt calls for a rate cut from more dovish board members, a former senior official told MNI.
While inflation can be expected to remain close to the 2% target over the course of the next 12 months, a dip lower cannot be ruled out, Petr Kral said in an interview.
But, with the policy rate close to neutral at 3.5%, it would take a significant change in the outlook to convince a majority hawkish bank board to ease, he said.
“Experience may affect some board members, particularly the governor, to say that below the target is good enough, especially after we have gone through a period where it was above the target,” said Kral, who spent 25 years at the CNB, and was head of its Monetary Section from 2018-2025. (See MNI EM INTERVIEW: Slower Inflation To Test CNB Hawks - Singer)
Dovish unease may become more pronounced if the period of undershoot exceeds three or four months, Kral said - an outcome made more likely if Germany’s economic malaise continues.
“We cannot rule out that below the target period might be somewhat protracted and might be somewhat longer than currently foreseen. Under such conditions, there might be some voices among board members to help the economy with some further interest rate cut.”
Inflation was 0.3 percentage points lower than the CNB’s forecast at 2.1% in December, and averaged 2.5% for the year.
ETS2 DELAY
A delay to the extension of the EU’s ETS2 emissions trading scheme to household heating and road transport means an additional source of upwards price pressure from higher energy bills has been temporarily removed. The new government’s decision to absorb fees paid by households and firms for renewable energy should shave around 0.3% off annual CPI inflation, Kral added.
There may also be some downward pressure from falling agricultural producer prices and food prices, after a period of upward surprises for food, he said.
“Volatility of food prices is quite huge - which might be related to the Czech Statistical Office’s decision to calculate the monthly prices of food based on the so-called scanner data, which directly measures price movements from the cashiers of retailers. Retailers typically put in place many price campaigns which are now captured in the officially-produced data more than they were before.”
But, while Kral said the CNB would be well advised to look through changes in administrative price measures, secure in the knowledge that they will drop out the following year, he added that “we still do not know precisely the reaction function of this Bank Board.
UPSIDE RISKS
Upside inflation risks stem from a consumer-driven economy growing at close to its 3% potential, strong private sector nominal wage growth and rising imputed rents mean that services price inflation is unlikely to decline significantly, Kral said.
Fiscal measures by Prime Minister Andrej Babis’s new government may also tend to drive prices higher, though details are still lacking.
The current board has emphasised that government spending is a pro-inflationary factor over the medium term, despite the previous government’s efforts at fiscal consolidation, Kral noted.
“If those board members are to be consistent, they should emphasise the pro-inflationary fiscal risk from now onwards,” Kral said. “Whether they will do so remains to be seen, but they have at least communicated that to some degree since the autumn, so they could to some extent meet that obligation without needing to depart completely from their current position.”
Whatever the new government does with fiscal policy is unlikely to have any “dramatic” monetary policy implications, Kral said. But board members will want to stay “as far away as possible” from any public discussion of the fiscal deficit.”
While the koruna has appreciated significantly against the dollar, and to a lesser extent against the euro, further strengthening cannot be ruled out, said Kral
