MNI INTERVIEW: CNB To Cut 2-3 Times This Year - Ex-Gov Singer

The Czech National Bank will cut its two-week repo rate by at most three times this year, with upside inflation risks from wages, electoral giveaways and German defence spending even as a potential diversion of Chinese goods away from the U.S. could ease price pressures, its former governor told MNI.

“I would say there is no need to cut in March, especially since there are still tensions related to a lack of labour force, especially those willing to work in services,” Miroslav Singer said in an interview, noting that while producer prices are falling, services prices and more labour-intensive constructions costs are rising.

“I do not expect them to cut right now, but I still expect them to cut at least twice this year.  My base case is probably a terminal rate of 3.25%, but there is a risk that it could also be 3.5%.” (See RPT-MNI EM INTERVIEW2: Lag Justifies Faster CNB Easing - Holub)

With inflation below 3%, the Bank Board can move in 25-basis-point increments, with little to be gained by front-loading easing, he said.

Yet Singer, who led the CNB from 2010-2016, warned policymakers in both Prague and Frankfurt to be alert to the effects of relatively tight labour markets, low growth and rising government spending.

“The labour market is a concern, and this perhaps is most apparent in services, and, in particular in the Czech Republic, the tourism sector, where labour shortages are again increasing compared with the end of last year,” he said. (See MNI EM INTERVIEW: Czech National Bank Seen Holding This Month)

WARY OF INFLATION

“That again also tells you why all central bankers - not only in our country, but in the ECB too - should be more worried about big spending impulses, inflation-wise, compared with the crisis of 2009-10. Then this was not an issue because we had high unemployment, but we currently have almost no unemployment in Western Europe.”

Czech plans to raise spending on defence by 0.2% of GDP a year until 2030 are unlikely to constitute an upside inflation risk, though fiscal giveaways to voters in the run-up to this year’s parliamentary elections could have an effect, he said. After the vote, budget consolidation by the incoming government should assist the central bank, according to Singer. (See MNI EM INTERVIEW: Czech Defence Boost Means Cuts Elsewhere- Holub)

External factors however are a significant source of uncertainty.

"At the moment the situation regarding tariffs is too unclear to say anything with any degree of certainty. At the same time, were Chinese goods to be excluded from the US they would likely fly to Europe,” the former governor said. “This is the kind of anti-inflationary situation that could prompt the central bank to cut three times this year - although I would be surprised to see a stronger reaction than that.”

GERMAN SPENDING

A boost to German military spending would add to Czech demand pressures, Singer said, although its ultimate effect on policy may not be significant.

“The Germans have again promised to spend big money on armaments - as they did three years ago, when Russia attacked Ukraine. It never really happened. But were it to, it would have implications for Czech industrial output, which points in the direction of reasonable carefulness - to which the Board is prone anyway.”

One longer-term upside risk to the inflation outlook recently highlighted by current CNB Governor Ales Michl is the potential acceleration of money creation stemming from a significant recovery in lending, especially to the property market.

“I don’t think money growth, loan growth, is a serious upside risk. It’s more something the governor himself cares about,” Singer said, adding that he too had been “obsessed” with money growth when he joined the Bank, before realising it was a poor forward-looking indicator of inflation.

“I would consider it a feature of communication, rather than a substantial part of policymaking.”