MNI INTERVIEW: Czech Rates Too High- Ex-Deputy Governor

The Czech Republic’s interest rates are too high and the pace of easing may be too slow given downside risks to growth, former Czech National Bank deputy governor Tomas Nidetzky told MNI.

The CNB began easing last December, increasing the pace of rate cuts from 25 to 50 basis points at February’s meeting on the back of January’s 2.3% inflation print to leave the benchmark 2W repo rate at 6.25%, down from a cycle high of 7%.

Nidetzky, a CNB Board member from 2016 and deputy governor from 2018-22, who took over as head of the Czech National Investment Bank (NRB) last May, said the Bank was likely to cut by 50 basis points again at its next meeting in March, though he was marginally more optimistic on growth than the CNB in predicting that output will rise by around 1% this year.

Nevertheless, he pointed to transmission lags of 12-18 months, warning that monetary conditions could stay too restrictive for too long.

TOO RESTRICTIVE

“I do think that the reference rate of the Czech National Bank is too strict now, and that the bank is a little bit behind the curve,” he said. “On the other hand, just one inflation figure says nothing, so some sort of cautiousness is important.”

While inflation might bump higher on the path back to the 2% target level, growth is now a significant concern, he said.

“We are moving away slightly from getting inflation under control and being the main economic issue, into another phase where the question is how to boost growth in the future, and that will take more time than a year,” he said.

"We probably should have raised rates further and decreased them sooner. Inflation has come down, of course, and that is good. It seems to me that an interest rate of 6.25% when inflation is only 2.3% is very restrictive. More so than when we had inflation at 18% and rates at 7%.”

GDP grew by 0.2% in January, according to flash estimates, with the central bank revising down its annual projection for 2024 from 1.2% in November to 0.6% in February.

Six members of the CNB Board voted for lower rates by 50bp at the last meeting, with only one in favour of reducing rates by 75bp.

MARCH MEETING

“I would expect them to cut by another 50bp at the next meeting, and that we will end up at around 4% with inflation either at 2% or at the upper range of the tolerance band,” Nidetzky said, noting the fiscal consolidation had also been key for bringing down inflation.

Exchange rates are an important aspect of domestic monetary policy, and recent crown weakness is both expected and on the whole supportive of foreign demand for Czech goods, Nidetzky said.

“What we can see now is a depreciation of the crown that helps our export-oriented economic model. That is an important aspect of the easing process,” he said. “If there is too much depreciation, the CNB still has huge foreign exchange reserves and, if they are willing and brave enough, it can enter the market as it did at the start of the war [in Ukraine] when there was some turmoil on the market. But it will be up to the Bank Board whether they also want to use exchange-based monetary policy.”