MNI INTERVIEW: More Room For Czech Rate Cuts - Ex-CNB Official

The Czech National Bank overstated upside inflation risks when it opted to leave monetary policy unchanged last week, and there is room for two or more cuts this year, the former head of its monetary department told MNI.

“I would say that after the pause in December, and now in March, the Board will be discussing very seriously for the interest rate to be cut at its May monetary policy meeting,” Petr Kral said in an interview after the CNB held the key two-week repo rate at 3.75% on March 27.

With the repo rate some way above the 3% level Kral and former Monetary Department colleagues estimated as neutral, the easing cycle still has scope for two or three more cuts this year, he said, though he acknowledged that the Board sees neutral as being higher.

While Kral, who left the Bank in January after 25 years, agreed with Governor Ales Michl that rising property prices and loan demand could threaten the inflation outlook over the medium-term, he noted that goods prices are roughly flat, while the labour market and GDP growth are moving more-or-less in line with CNB projections.

TARIFF IMPACT

The CNB said tariffs, better-than-expected growth and rising services prices feeding higher wages meant the balance of risks had become “more inflationary.” But even in services there are signs of deceleration, Kral said, adding that risks to core inflation are “maybe less pronounced compared to what the CNB has been communicating.”

While after a couple of years of declining real disposable income, workers will push to maintain the pace of wage growth, this should be compensated by a further decline in profit margins. 

“There is still some scope on the margins to accommodate higher than average nominal wage increases in the business sector without much effect on pricing and price developments,” Kral said. 

He was critical of the “mechanical” fashion in which pro-inflationary arguments have been presented by the Board in recent meetings “without much change or further elaboration.”

“These are now supported by new arguments stemming from the fact that new tariffs and trade wars are seen primarily, especially in the short term, as of a stagflationary or pro-inflationary feature that might complicate the fine-tuning of the last mile,” he said.

Kral also disagreed with Michl's view that the greatest inflationary risk came from increased fiscal deficits and monetary easing as a response to trade wars.

“The New Keynesian-style effects of fiscal policy might be relevant for the inflation outlook, but those views are still far away from the impact I see it having, and therefore the impact fiscal policy might have on CNB decisions,” he said.

BEST TO BE NEUTRAL

Germany’s big planned boost to infrastructure and defence spending should have little near-term impact on either Czech inflation or growth, Kral said. Czech growth is likely to be driven this year by 2.5% growth in private consumption as households reallocate disposable income away from savings and into spending, he said. 

The CNB should deal with heightened uncertainty around U.S. tariffs from as neutral a position as possible, allowing it either to cut or to tighten monetary conditions depending on their impact on prices, he said. 

“If we do still have some quite vivid nominal wage growth in the business sector, a symmetric position would be, as I see it, the most advantageous position to stand in.”

The CNB should also maintain its own tradition of being forward-looking, with decisions based principally on the quarterly forecast and an assessment of the balance of risks, rather than being too reliant on backward-looking data.

“What is important is that the market understands your reaction function. I would recommend to the ECB - and any other central bank - to move quickly to get back the old era in which monetary policy was, as I see it, very predictable and very well understood,” Kral said. “You will always face some challenges. There is no steady state ahead of us. But to have some principle which you follow, and which is also understood by the markets, is very important.”