MNI INTERVIEW: CNB's Next Move Could Be A Hike - Ex-Advisor

The Czech National Bank will hold this month but could still cut interest rates around the middle of this year,  though the likelihood that its next move will be a hike has grown in the wake of the U.S.-Israeli attack on Iran, a former senior staffer told MNI. 

The CNB held rates at 3.5% last month, and while a cut this year is "certainly not completely off the table, it is much less likely than two weeks ago," Michael Skorepa said in an interview. (See MNI EM CNB WATCH: Unanimous Support For Rate Hold At 3.5%)

Further easing would be the “natural step” should the current Middle East crisis be resolved quickly, combined with a “sizeable” appreciation of the Czech koruna, he said, but the CNB’s willingness to see through the first-round effects of shocks to volatile parts of the CPI basket, such as energy and food, might be asymmetrical, meaning rates could rise before inflation -- currently at 1.6% --  goes  “significantly” above the 2% target.

“Given that over the last decade Czech inflation has been almost all the time above the target, the Board members may feel that some rebuilding of the reputation of the inflation target is in order now, even at the cost of reacting to first-round pro-inflationary effects as well,” said Skorepa, who was director of monetary policy and strategy and advisor to the CNB’s Bank Board.

Second-round effects from commodities price spikes are most likely to appear in the chemical industry and transportation in a few months, Skorepa said, but may be muted if the war ends soon. 

“I presume the Board will build their decisions on forecasts of those effects, months ahead. Such forecasts are notoriously difficult, but at this moment the shock to prices of oil and gas does not seem dramatic enough to raise the risk of a major policy mistake if the CNB experts do not predict the first- and second- round effects correctly.”

Fiscal policy also poses upside risks to inflation said Skorepa, adding that he thought Board members could have emphasised this danger more in their communications over recent months.

“If this element were getting its fair weight, maybe the idea of rate cutting this year would not get as much attention as it has.” (See MNI EM INTERVIEW: Czech Fiscal Gap To Hit 3% GDP-Council Chair)