MNI INTERVIEW2: CNB Should Ignore Brief Inflation Dip - Holub

The Czech National Bank should look through any temporary dip below its 2% inflation target caused by the new government's decision to absorb the cost of renewable energy levies, outgoing deputy finance minister and former CNB deputy governor Tomas Holub told MNI in an interview.

The CNB should instead focus on the pro-inflationary effects of expansionary fiscal policy, Holub said.

Headline inflation will fall below November's 2.1% if, in addition to declining wholesale prices, green contributions are transferred onto the state balance sheet, he said. But he urged rate-setters to look through such one-off price level shifts, with the government’s spending plans an argument for a “somewhat more restrictive policy stance.”

Under governor Ales Michl — a sometime advisor to PM Andrej Babis — the CNB is “more or less in data dependent mode, and the forward looking nature of monetary policy has been de-emphasised. I can imagine that they could respond to temporarily below-target inflation by cutting a bit further," Holub said.

"They are still probably somewhat above the neutral rate, which traditionally has been estimated at around 3% in nominal terms, so they could go down to three" from the current 3.5% policy rate.

COMMUNICATION STRUGGLE

Yet this creates communication problems given that the Banks has consistently expressed concern about the pro-inflationary risks of fiscal policy, even as budget deficits were coming down, he said.

"To now drop it from their communication when budget deficits will increase would look suspicious — especially given Michl’s past close links with Babis. That could be a problem for central bank credibility," Holub added. (See MNI EM INTERVIEW: CNB Likely Done At 3.5% - Ex-Governor Singer)

The CNB will decide on rates next week, and while a policy hold is widely expected, some analysts believe there may be cuts next year. That view was not supported by Bank Board member Jan Kubicek, who on Thursday said the next step is more likely to be a hike than a cut, though he could not predict when one might come.

Rates should not be eased in response to the one-off effect of lower energy prices, Kubicek added.