Interview of Jan Kubíček, Bank Board Member
By Peter Laca (Bloomberg 10. 12. 2024)
Persistent inflation pressure in the Czech Republic may warrant a pause in interest-rate cuts as early as this month, according to a member of the central bank’s board who has supported the yearlong monetary easing cycle.
Czech consumer-price growth has been brought down close to the bank’s target, allowing policymakers to slash borrowing costs in eight consecutive steps. But while economic recovery remains fragile, increases in the price of services is fueling a chorus of voices calling for a more cautious approach.
Jan Kubicek, who sits on the central bank’s rate-setting panel, said his focus is core inflation, which reflects domestic demand pressures, rather than the likelihood of the headline figure exceeding 3% soon. The core reading of around 2.4% isn’t “a particularly bad number at first sight,” but shows that disinflation in services had come to an end with little prospect of slowing below 2% next year, he said.
“I’m a little bit worried that we might not manage to bring the disinflation run to the finish line of the inflation target,” Kubicek, 48, said in an interview in Prague on Monday. “We are in the last mile, and we already see the finish line, but we haven’t reached it yet. This for me is one of the arguments to be even more cautious with lowering rates.”
Governor Ales Michl said last week that monetary easing will “very likely” be paused soon, while Deputy Governor Eva Zamrazilova already cast a dissenting vote for holding rates at the previous meeting.
Data published on Tuesday show inflation in November was 2.8%, slightly less than analysts and the central bank expected. Still, that is near the upper end of the bank’s tolerance range, and the cost of services outpaced the overall price growth.
Continued growth in the cost of services indicates that it’s a “separate, more persistent” risk rather than a residual effect of the previous inflation wave that will gradually fade away, Kubicek said. The reason may be a shift in demand structure, as evidenced by a decline in employment in industry while still growing relatively quickly in services.
“Today, I would be leaning more toward a pause in rate cuts, but we’ll see in two weeks,” he said, pointing to more data due by the Dec. 19 meeting and policy decisions from the European Central Bank and the US Federal Reserve. “I’d like to leave the door open, but from today’s point of view, it seems to me that the balance of risks is more on the inflationary side.”
Monetary policy remains restrictive, albeit less than previously with a narrowing in the difference between the benchmark at 4% and the neutral rate, which may be around half a percentage point lower, according to Kubicek. There is room for more easing, but the question is timing, he said.
“If we get to 3.5%, let’s say in spring next year, then the discussion will be whether to continue further,” the central banker said. “I think the current market rates reflect this relatively well.”
Money market rates indicate that investors mostly scaled back bets on a cut in December, and anticipate around 50 basis points of easing within the next 12 months.
While a December pause in cuts is possible, all options are open for the following meeting in February, said Kubicek. Future decisions will be based on data from the domestic economy and from abroad, while policy actions of the ECB and the Fed will be also part of the discussion, he said.
“I don’t want to close my room for maneuver,” Kubicek said. “Given the data right now, I think it would be enough to skip one meeting and then we’ll see.”