(Bloomberg) -- Economies around world are set for more pronounced swings in consumer prices that will require tighter monetary and fiscal policies than in the past, according to Czech central bank Governor Ales Michl.
“After a period of high inflation, we are now entering a phase of higher inflation volatility around central bank targets, with an upside risk,” Michl said in remarks from last week’s central banking conference in Mexico City, which were posted on the Czech National Bank’s website on Monday.
The governor reiterated his view that the current persistent price pressure was the result of near-zero borrowing costs for over 10 years before the coronavirus pandemic that led to excessive money creation. That’s why, he said, central banks now need to maintain interest rates higher for a prolonged period while governments must balance their budgets.
“Failure to do so could risk a second wave of inflation, with another cost shock potentially acting as a trigger,” Michl said.
Policymakers in Prague have lowered their benchmark rate by 3 percentage points in the past year to 4%, delivering the eight consecutive cut earlier this month. Still, Michl said “some degree of restriction” was still necessary to ensure low core inflation, which was key for keeping headline price growth in check in a small and open economy like the Czech Republic.
“Looking ahead, core inflation may need to be slightly below 2%,” he said. “Since this is not reflected in our current outlook, we are already discussing the appropriate time to pause rate cuts.”
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