Interview of Jan Kubíček, Bank Board Member
By Jan Lopatka and Jason Hovet (Reuters 16. 9. 2024)
Czech National Bank board member Jan Kubicek said he favours another quarter-point rate cut this month given soft economic data, a slightly firmer currency, near-target inflation and lower wage growth.
The Czech central bank slowed the pace of easing to 25 basis points in August, from previous 50-point steps, bringing the main repo rate down to 4.50%.
Its staff forecast released after its August meeting penned in no more easing before the end of the year, surprising financial markets. Kubicek, however, said he believes economic conditions now provide room for further easing when the board meets on Sept. 25.
"We will see what the update of the forecast brings. But I believe that certainly there is still room for decline," Kubicek told Reuters in an interview conducted last Friday.
"I am glad we have slowed the pace of the decline to the standard quarter-point mode, but I think that it is not yet the time to shift to the European Central Bank mode of cutting once and then not, then again."
His comments follow Vice-Governor Eva Zamrazilova who also said last week she saw no reason to stop easing.
Kubicek has voted with the majority of the seven-member board at all meetings this year, including 50 bps cuts in February-June and last month's 25 bps cut.
He said the crown's weakening following a 50-bps cut in June was a surprise to him, but now the crown has firmed above the forecast in the staff's August outlook, which should allow for lower rates.
The bank's staff forecast seeing the main repo rate at 4.50% through the end of the year marked a rise from the start of the year when the staff predicted the repo rate would be at 3.0% in the fourth quarter.
Kubicek said this was caused largely by the forecasting model being influenced by a volatile Euribor rate.
"Numbers from the real economy rather point lower than what we had thought in the spring," Kubicek said.
"Household consumption is developing roughly in line with assumptions, inflation as well, so the difference in implied interest rates was to a large extent generated by the different development of Euribor."
"I always look at what caused changes - and if it is the Euribor, I give it less weight."
Kubicek was not prepared to say if the 25 basis-point easing cycle should continue at the bank's November and December meetings.
Financial markets have also priced in further easing despite the staff forecast.
Kubicek said that while inflation dropped to the bank's target area, standing at 2.2% in August, it was still affected by volatility and changes in prices not under the bank's control, such as food and fuels.
He said core inflation was hovering above 2%, which was cause for a cautious approach to rate cuts.
Prices of services have continued to rise fast, at around 5%, but Kubicek said he believed this was due to them catching up with goods prices that had soared over the past two years, rather than a new flashpoint of future inflation.
Wages were a positive sign, he said. They grew by a nominal 6.5% in the second quarter, slower than the bank's forecast of 7.2%.
"That calms me in the sense that as services inflation is partially driven by wages, then we can assume that services inflation will slow down," Kubicek said.
Czech central banker calls for companies switching to euros to be in policy models
Czech central bank board member Jan Kubicek called for its monetary policy to start taking into account local companies switching their borrowing out of Czech crowns into euros at times of high interest rate differentials.
Policy recommendations from its models during the inflation wave of 2021-2023 would have been different if the central bank had taken into account that companies raised the proportion of loans in euros as interest rates jumped, Kubicek told Reuters.
The shift came as the Czech National Bank began raising interest rates much sooner than the European Central Bank.
Switching to euros helped Czech firms escape high domestic rates, which in turn limited the effectiveness of that part of the central bank's credit channel as a monetary policy tool.
Kubicek said in an interview this factor should be included, regardless of other recommendations by three external reviews of the bank's policymaking due to be completed by the end of 2024.
"We will have an explicitly included mechanism that companies can switch into euros and back, depending on the interest rate differential between crown and euro rates, and that in itself can influence our decision making," he said.
Kubicek said including the phenomenon in the past would have resulted in fewer steep rate hikes and subsequent quick cuts -- a scenario he called "Matterhorn" -- in the past than the central bank's model recommended.
"It would have helped us. I believe the model would not have generated the Matterhorn because it would have taken into account that companies are switching to euro loans."
The policy board rejected the sharper rate hikes seen in models in 2022 and instead opted for a longer period of keeping rates at a peak of 7%. It began cutting the rate in December last year to its current level of 4.50%.
The central bank this year commissioned three reviews to look at interactions of monetary and fiscal policies, how its model outcomes are transformed to policy recommendations for the board, and the setting and interactions of individual models.
Kubicek expects evolutionary rather than revolutionary changes in its inflation-targeting policy framework as a result.