Czech Path to Rate Cuts May Take Longer, New Central Banker Says

Interview of Jan Kubíček, Bank Board Member
By Peter Laca and Krystof Chamonikolas (Bloomberg 25. 4. 2023)

The Czech central bank may start lowering borrowing costs later than most investors expect to prevent lingering price risks from derailing its efforts to tame inflation, a new board member said.

Monetary policy is restrictive enough now — with the highest rates since 1999 and the koruna near its strongest levels in nearly 15 years — but a widening budget deficit and rising wages may fuel upward pressure on the cost of goods and services, Jan Kubicek, who joined the board in February, said in an interview.

While no immediate action is needed, it should be clearer in August whether more tightening is needed or how long rates will stay on hold, he said.

“We will probably see in the summer whether the budget can stabilize and return to the planned trajectory,” Kubicek said in Prague Monday. “If budget consolidation doesn’t happen, for me that would be a reason to think about raising rates, or postponing rate cuts.”

The $300 billion economy is emerging from a mild recession, with unemployment rate running at the lowest level in the European Union — leaving policymakers to closely follow salary negotiations. The bank sees inflation falling sharply this year — from the current level of 15% — and returning to the 2% target in the first half of next year.

Kubicek, who will attend his second rate meeting on May 3, is also watching price growth stripped of volatile items like food and energy, which has been slowing less than he initially thought. He said it’s too early to say when policy easing may begin, but it might happen later and go more slowly than the current market assessment — which foresees cuts of about 100 basis points starting in September.

“I don’t have reservations about cutting rates this year, but I will first want to see that our policy is working and that the pace of disinflation is in line with our expectations, especially in terms of core inflation,” he said.

He agreed with the bank’s strategy for holding rates stable since last June even as the bank’s staff forecast implies raising rates further and then cutting them months later.

“I personally prefer smoothing out the rate path more,” he said. “That means delivering monetary tightening over a longer time rather than by a sharp increase in rates, followed by an even faster decrease.”

The stronger koruna is helping rein in inflation, while also reducing the need for further rate hikes at a time when companies are ramping up financing with cheaper euro loans, according to the board member.

A key factor behind the Czech currency’s strength is the central bank’s year-old pledge to prevent excessive depreciation, but recent gains have also been driven by an improving trade balance.

“I don’t see the koruna as fundamentally overvalued right now,” Kubicek said.

The board hasn’t discussed abandoning the current intervention regime, and Kubicek sees no reason to do so while the fight against inflation isn’t over. He “can imagine” the bank eventually cutting rates while keeping the intervention regime in place for some time, mostly to prevent excessive volatility, he said.

“What the central bank did last year is merely reminding the market that it has substantial foreign reserves and is not afraid to use them,” he said. “This is broadly in line with our long-standing managed-float regime — and the only difference is that the tolerance for market swings is now smaller than in the past.”