MNI INTERVIEW: CNB Should Look Through 1st-Rnd Effects-Seidler

Czech inflation will near 3% by 2027, but while a rate hike is likelier now than a few weeks ago, policymakers should look through first-round effects as far as possible, taking cuts off the table for the foreseeable future and making a hold appropriate on May 7, Bank Board member Jakub Seidler told MNI.

The stagflationary shock and uncertainty unleashed by the U.S.-Israeli attack on Iran is challenging from analytical and communication perspectives, he said in an interview, though the rise in inflation to 1.9% in March was mostly driven by first-round effects such as fuel prices.

“It is important to explain that we should not react to first-round effects of the crisis, but rather to second-round effects should they appear.”

Some primary effects may take longer to manifest but should remain the driving force behind price pressures until the beginning of 2027, Seidler said, noting that household energy costs will not rise for a couple of quarters due to fixed contracts. (See MNI EM INTERVIEW: Nuclear Key To Czech Energy Strategy - Havlicek)

“Much will depend on how long the conflict in the Middle East lasts, but assuming there is a relatively quick resolution it is likely that inflation will be approaching 3% at the beginning of next year,” Seidler said, adding that the CNB does not focus on particular oil price or exchange rate thresholds.

“Taking all this into account, I incline to leaving monetary policy rates on hold in May,” he said, adding that while hikes are more likely the longer the conflict continues, he can “still imagine looking through the situation. But it will always depend on the details, how agents behave, how the economy is developing and what kind of risks develop.”

CORPORATE BEHAVIOUR KEY

Household inflation expectations, which spiked in April, are “crucial” to the outlook, if “not well measured,” Seidler said.

“For me, companies’ behaviour is more important right now, because, based on relatively recent experience of inflationary shocks, there might be a greater inclination towards margin expansion and increasing final prices even more than would be in line with the increase in costs.”

The CNB began the crisis in a relatively good position, Seidler said, with the two-week repo rate still “slightly restrictive” at 3.50%, the economy shielded from some energy price inflation by the removal of the renewable energy surcharge, and monetary conditions tightened to some degree by financial markets and a relatively stable currency.

From next quarter imputed rents, a key component in core inflation, could also lose some of the momentum gained in the first part of 2026, when changes to mortgage rules led to frontloading and a pickup in imputed rents, Seidler said.

Fiscal policy under new Prime Minister Andrzej Babis is not expected to boost inflation much more than the previous government’s “relatively small” contribution, Seidler said, though more will be known about 2027 in the second half of this year, with the publication of the budget. (See MNI EM INTERVIEW: Czech To Ease Fiscal Rules-FinMin Schillerova)

Economic growth, which the CNB’s February forecast put at 2.9% in 2026 and 2027, will be lower due to higher inflation and the weaker performance of countries such as Germany, Seidler said, with corporate investment also down due to lack of confidence and faltering demand, though firms do not view interest rates as a strong impediment. (See MNI INTERVIEW: Bulked-Up NRB To Boost Czech Growth - Nidetzky)

The CNB is currently in the process of building two new forecasting models, and Seidler said one of these is already being used to make shadow forecasts that will be published after a period of assessment.

“Ultimately, the idea is to have a more thorough expert discussion that will enhance our forecasting framework, with the Monetary Department taking ownership of the main forecast, and a team in the Research Department trying both to cooperate with and to challenge that forecast based on a different model,” he said.