Frait Highlights Restrictive MonPol Environment, Says Policy Could Still Be Tightened

Czech monetary policy has recently been having a considerably restrictive effect, CNB Deputy Governor Jan Frait and his advisor Jakub Mateju wrote in a blog post on the central bank's website today, warning against placing too much emphasis on the level of nominal monetary policy rates.

• "Ex ante real interest rates better capture the effect of the current levels of interest rates which businesses and households compare with their future expectations (...) However, commentaries on monetary policy often forget its other integral part, together with which it creates monetary conditions, and that is the exchange rate."
• "So how is the CNB's monetary policy working overall now, aided by both the interest rate and exchange rate components? (...) monetary policy has recently been having a considerably restrictive effect (...) By historical comparison, the overall monetary conditions were tighter only between summer 2007 and summer 2008 when, in addition to elevated interest rates, the koruna appreciated strongly."
• "It cannot be ruled out that the restrictiveness of monetary policy may not be sufficient in the coming months. Accelerating growth in wages, a too slow fading of core inflation and rapidly recovering credit growth accompanied by rising share prices could be such signals."
• "Therefore, even at this time when inflation pressures seem to be easing, a need for a further tightening of monetary policy cannot be fully ruled out. However, it is important to bear in mind that this tightening can take place through both interest rate and exchange rate conditions. "
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