MNI INTERVIEW2: Policy Lag Justifies Faster CNB Easing - Holub
MNI (LONDON) - A likely decline of iInflation to around 2.4% or lower this year should allow the Czech National Bank to be more aggressive in cutting rates, deputy finance minister and former CNB Bank Board member Tomas Holub told MNI, saying that it was underestimating the lagged effect of restrictive monetary policy.
While the CNB said that further monetary policy easing will be approached with caution due to persistent inflationary risks when it cut its two-week repo rate by 250bps to 3.75% in February, Holub said the Bank should focus more on the inflation outlook for 2026, given that monetary policy has a lag of at least one year in the Czech Republic. Most forecasts, including those of the Czech National Bank, agree that inflation will be back to the 2% target in 2026, from 2.8% in February, he noted, adding that average forecasts saw inflation at 2.3-2.4% this year.
“That in turn implies in the CNB’s forecast that interest rates might be close to the 3% assumed neutral level by the middle of this year, and I personally don't have any strong disagreement with this outlook,” he said. (See MNI CNB WATCH: 25BP Cut To 3.75%, Highlights Risks)
“Of course, I'm not a decision maker anymore. But until I left the Board at the end of last November, I was voting for a somewhat swifter pace of easing, taking a bit more of a forward-looking view, not so data dependent. It seems to me that the current Board’s preference is to move a bit slower than their own forecast of the central bank is suggesting. And while I personally see the risk outlook as quite balanced, it's their assessment which leads them to this conclusion.”
RED TAPE
A recent CNB proposal to the Ministry of Finance to cut red tape by removing a number of reporting rules for banks by the end of the year is currently under consideration, having been formally delivered only last week, Holub said.
“My first impression is that the proposals are not a complete game-changer. They could relax the financial regulations on the margin, and we'll need some discussions with the central bank and the financial industry on the particular details and to start the work jointly on some proposals that would go in the direction of reducing the administrative burden. One also needs to take into account that this legislative period is coming to its end, given the upcoming general elections, therefore there is not much scope to get things approved under the current parliament.”
Asked to comment on plans to replace CNB Governor Ales Michl with the finance ministry's Marek Mora on the EBRD's Board of Governors - a move the CNB is resisting - Holub said he could see no reason why there should be any opposition to the switch given Mora’s record of private sector experience and public service at national and international level.
“[He] is very strongly recognized here in the Czech Republic, I would say, both by the current coalition and the opposition. Of course, he still needs to be approved by the EIB. But as far as I know, there is an agreement that for the next four years this place will be occupied by a candidate from the Czech Republic, and I personally cannot imagine any objections to him.”