Interview of Tomáš Holub, Bank Board member
By Jan Lopatka (Reuters 25. 10. 2023)
Czech central bankers face a dilemma whether to start lowering interest rates in the remainder of this year or wait for indications of price markups by companies in January and then possibly cut faster, board member Tomas Holub told Reuters.
Holub said both Nov. 2 and Dec. 21 policy meetings were "live" for him in terms of considering rate cuts.
The central bank has held interest rates at 7% since June 2022. But it opened a debate on cuts at its last meeting on Sept. 27, without giving many clues on timing.
Holub voted for a rate hike as recently as the bank's June meeting to anchor inflation expectations.
"I for myself can imagine both strategies. Either wait-and-see, and when we see, then in my view we can go quite quickly down if (January repricing) turns out well," Holub said. "Or start slowly and then continue at the same pace, increase pace or reduce pace."
"I would not want to say it in a hard way - maybe I slightly lean toward starting now, but it is not a fundamental preference."
Holub said a potential cut in November would not exclude a cut in December, but he would also not commit to that.
Inflation peaked at 18% in September 2022 and has come down to 6.9% this September.
A further drop is expected in January, and the bank sees headline inflation near its 2% target in the first half of 2024.
The size of repricing in January - when companies and service providers now used to rapid inflation typically raise their prices for the new year - remains a risk, said Holub.
"I see quite some inertia in services prices," he said. January repricing "is now the main source of uncertainty, which in my view is a concrete manifestation of concern over anchoring of inflation expectations".
The board will discuss a new staff forecast in November, which Holub said may chart lower 2024 economic growth than the previously forecast 2.3%, taming some inflation pressures. Risks from wage growth remained but were somewhat smaller than earlier, he said.
Holub said the board would likely stay on a rate path above that suggested by its staff forecasts, in line with the board statement from the September meeting.
The rate path during next year will depend on data as well as the crown's reaction to a narrowing interest rate differential with the euro zone, Holub said.
"If we see inflation clearly at 2% early next year with a positive outlook, we can talk about whether, at some meetings during 2024, we can lower rates faster than the 'standard' 25 basis points," he said.
"On the other hand, if we are in the less favourable scenario where core inflation remains above 3%, then rates at around 4.5%, where we hypothetically could get by the end of the next year with regular standard cuts, may be just abound right to finish putting out the inflation fire."