MNI INTERVIEW: Czech National Bank May Hold In Dec-Zamrazilova

MNI (VIENNA) - It is possible the Czech National Bank will pause its easing cycle in December, Deputy Governor Eva Zamrazilova told MNI, citing the risk that further near-term cuts will only add to strengthening inflationary pressures.

“I don’t know what will be decided at the next meeting. I'm not trying to convince or to push anyone. However from my perspective it’s very possible that we will hold interest rates where they are,” Zamrazilova said in an interview on the sidelines of the Austrian National Bank’s CEEI conference in Vienna. 

Core inflation is a key concern, with the overall pace of price increases expected to rise above the 3% tolerance band this quarter.

“I hope that consumers will not perceive this as more permanent pressure, because it should evaporate in a couple of months. But households are not generally forward-looking and rational; they are more backward-looking and adaptive. So I am a little concerned about how people respond when they see the inflation figure beginning with a three.”

Zamrazilova was the only member of the CNB’s seven-member Bank Board to advocate a rate hold earlier this month, with five members in favour of lowering the 2W repo rate by 25 basis points to 4.00%, and one member voting for a half-point cut.

Inflationary patterns were already a source of concern at the Nov 7 meeting, Zamrazilova said, with services inflation proving “stubborn.” This week’s agricultural producers’ price data confirmed volatile food prices are unlikely to offer the central bank further help, she said.

HOUSING MARKET

Pressure is also building in the housing market, she noted.

“If we lower rates it may help a boom in mortgages which will further push up house prices, rents and imputed rents. For me, house prices represent a signal that really one should be careful,” Zamrazilova said.

“I would not want to give any forward guidance, but one of the main reasons why I voted for holding rates was that the latest inflation forecast predicts reaching the two 2% target level a year later than was seen in the previous, summer forecast. That's a problem.”

One item acting in the CNB’s favour is fuel prices, Zamrazilva said, adding that she hoped any risks would not materialise there.

Fiscal policy is currently operating with the “maximum possible space it can, but still it's not good from an inflationary perspective,” she said.

“The main problem remains that during and after the Covid period there were changes in taxation which decreased the income part of the state budget by around 90 billion crowns, and has since risen to 140 billion crowns. You simply cannot overcome this via cosmetic measures. For me, this is the most important reason why the structural deficit of the Czech economy has been maintained.”

Zamrazilova was cautious when asked to assess the current level of r* - the neutral rate of interest - for the Czech Republic, though it is likely to be a little bit higher than that of the euro area.

“In the past I saw the terminal in the foreseeable future between 3.0-3.5%,” she said. “But that’s a huge discussion globally, and one that I think will require more academic attention.”