Czech central banker Kubicek: no need for rate hike as wage, fiscal risks ease

Interview of Jan Kubíček, Bank Board Member
By Jan Lopatka and Robert Müller (Reuters 12. 6. 2023)

The Czech central bank does not need to hike rates further because the outlook for inflation drop is supported by lower wage growth, falling household spending and budget savings programme, board member Jan Kubicek said on Monday.

The seven-strong board will be discussing whether to keep rates stable or raise them on June 21, after three members other then Kubicek voted for a 25 basis-point hike last month.

Kubicek, 46, said this was not necessary, and the main rate should stay around 7% until around the end of the year.

"I do not see a reason for a hike," Kubicek, who joined the board in February, told Reuters.

Inflation eased to 11.1% in May, which was in line with expectations, he said.

Kubicek said a "signal hike" backed by board colleague Tomas Holub, would push back expectations of future cuts on the yield curve, but this was not needed.

"A signal hike is unnecessary at this point, the yield curve is relatively flat for several months."

Kubicek said he could not predict if rate lowering may start at the end of this year, or be pushed into 2024.

The board's May policy debate took place before first-quarter wage data showed 8.6% year-on-year growth, below the bank's expectation of 9.1% and industrial wage growth above 10% in January and February.

"The number was somewhat weaker than we had expected, so this risk we feared the most did not materialise," Kubicek said.

Monetary policy was taming demand, he said, with household consumption down 6.4% year-on-year in the first quarter.

"The drop in household spending has been larger than expected, that basically shows that our policy is sufficiently strict."

After the bank's May meeting, the government presented tax hikes and spending cuts aimed to reduce the budget deficit by nearly 100 billion crowns next year.

Kubicek said this year's budget deficit had developed worse than expected, but the savings plan could cut inflation by more than the bank's estimate of 0.2 of a percentage point in 2024.

Another reason against more rate hikes is that the interest rate differential over the euro zone drove companies into euro loans, lowering the effectiveness of monetary policy, he said, adding that the interest rate differential against the euro zone helped the crown currency's welcome strengthening last year.

The differential has halved as euro zone rates rose but the currency is now supported by an expected 300 billion crown improvement in the trade balance this year caused by lower energy prices and export recovery after logistical disruptions, Kubicek said.

He said the exchange rate was near its fundamental value based on models as well as comparison with neighbouring Slovakia, a euro zone member since 2009 which had long had higher nominal price levels which the strong crown drew closer.

"That is another argument why I believe the exchange rate is not overvalued, it was rather undervalued, looking back."