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Czech Policymakers Worried About Inflation Risks, Minutes Show

By Peter Laca
Tourists walk along the street near the Charles Bridge in Prague, Czechia, on Friday, May 3, 2024. The Czech central bank sold an equivalent of €300 million ($323 million) on the foreign-exchange market in March, matching the amount from the previous month as part of its program to sell some of the returns on its reserves. (Andrey Rudakov/Bloomberg)

(Bloomberg) -- Most Czech central bankers expressed concern about inflation risks brewing in the economy that warranted a strict monetary stance, according to minutes from the Nov. 7 meeting published on Friday.

The board’s discussion centered around persistent price pressure in services, a weakening exchange rate and a revival in property prices, before rate setters voted to lower the benchmark by 25 basis points to 4%. A worsening outlook for the domestic economy as well as weakness in Germany, the main export market, were the main anti-inflationary risks, the bank said in the minutes.

Governor Ales Michl said the increased inflation projection in the new staff forecast vindicated the board’s “hawkish communication”. He added the Czech National Bank needed to approach future policy easing with “great caution, and, if appropriate, to pause the interest rate reduction process.”

Selected points from the debate:

  • Vice Governor Eva Zamrazilova, who voted for stable rates last week, said the new forecast showed inflation rising slightly above the upper end of the tolerance band in the coming months, which called for a cautious approach and keeping monetary policy tight for longer.
  • Vice Governor Jan Frait said that inflation expectations could start to deviate above 2% because of a long-term overshooting of the target. Public concerns about inflation rising in the future might also partly explain the renewed growth in house prices. Frait considered a 25 basis point cut to be a “safe step.”
  • Frait also said that it would be “very difficult” to achieve the 2% inflation target without nominal koruna appreciation, given the current tight labor market.
  • Board member Jan Kubicek said inflation in services – despite lower wage growth and weaker demand – showed that current inflation “might have a different nature and persistence than we are able to model.”
  • Zamrazilova and Kubicek said that the combination of the interest-rate path and the exchange rate forecast would lead to expansionary monetary policy as early as the second quarter of 2025, which was a reason for caution.
  • Outgoing board member Tomas Holub, who sought a 50 basis-point cut, argued that risk of persistence of services prices was receding, as the growth in these prices was no longer as broad-based.

 

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