MNI INTERVIEW: CNB Leaning Towards 50BP Cut - Ex-Governor Singer

Sluggish growth, a strong koruna and on-target inflation mean the Czech National Bank is likely to cut interest rates by 50 basis points later this month, former governor Miroslav Singer told MNI, with the key reference rate ending the year around 100bp below its current level.

The CNB lowered the 2W repo rate by 50bp to 5.25% in May as annual CPI inflation fell 0.3% from April to 2.6%, leaving markets to ponder whether this month’s meeting will see a repeat reduction or a more cautious 25bp cut.

Both figures will be discussed when the CNB’s Bank Board meets next week, said Singer, governor from 2010 to 2016. However, Governor Ales Michl’s recent remark that rates will stay in restrictive territory regardless suggests a half-point reduction is increasingly likely.

“I think the communication is quite clear. What they are saying is that they will discuss a 25 or 50bp cut, and it appears to me they are opening the door for 50bp,” Singer said, adding that inflation should stabilise near 2% next year. (See MNI INTERVIEW: Czech Rates Too High- Ex-Deputy Governor)

“I also don't believe that he would not recognise what he's saying, which is that he’s open to the possibility of voting for a 50bp cut if the discussion leads in that direction and if the real world data allows for that, which it seems to me it will. As part of that debate the Board may also consider whether strength of the koruna allows for a sharper interest rate cut.”

NO REASON TO WAIT

Core inflation was 2.5% in May, close enough to CNB projections to give the Board a “clear idea about what this implies for policymaking,” Singer said, while far enough from 2% to be outside the margin of error. 

Singer saw little argument for waiting further before a cut, with a substantial amount of fresh data available between Board meetings.

“Unless I received new information that suggested 4.75% is only just restrictive and therefore needed - due to either an upside wage or other big data surprise - I would continue to ease at the next meeting,” Singer said.

While cutting rates to 4.25% by the end of the year might seem dovish, “that seems to be the Board’s mental framework at the moment. I can envisage a situation in which rates actually end up lower than that, but it will depend on the development of the economy. So far, I would say this assumption is reasonable.”

Central bank projections for 1.5% GDP growth this year and 2.5% in 2025 are “sluggish” by historical standards, Singer said, due in part to German economic weakness.

Yet the country is close to full employment, with labour markets showing few signs of cooling. Czech workers’  preference for job security over better pay means salary hikes are “not particularly important at this moment in time,” he said.

“Almost all firms are still trying to find workers - but I can imagine that the restrictiveness of rates, together with the strengthening of the currency, the weakness of the European economy, and the German economy in particular, could lead to a revisioning of this idea. But we are nowhere near there yet. (See MNI INTERVIEW: Weak Germany To Hit Czech Growth "For Years")

“At the same time, consumer confidence and retail indicate that people are becoming more comfortable with spending again, which is a sign of potential growth. Keep in mind, though, that as a mid-sized open European economy if people spend more you won’t initially see that show up in domestic price pressures, but on the increase of import volumes. In that respect we don’t have to worry as much about higher consumer spending translating into higher inflation.”

FED FIXATION

The prospect of delays to Federal Reserve rates cuts and the absence of clear forward guidance following the ECB’s 25bp June rate reduction are secondary factors for the CNB, despite their potential effect on the exchange rate, Singer said.

“The notion that we are somehow strongly tied to decisions taken in Frankfurt in particular is simply not true. Indeed I find myself profoundly surprised by the persistence of the idea that CNB is somehow fascinated with the Fed or the ECB in the context of discussing the CNB’s policymaking.”

Nor should much attention be paid to discussions around the neutral real rate of interest, which governor Michl recently posited may be around 3%.

“It might be useful for markets, but as a monetary policymaker one’s concern is the next move, not where you are going to be in a year, which is eight meetings’ time,” Singer said.