Interview of Jan Procházka, Bank Board Member
By Jan Lopatka (Reuters 12. 12. 2023)
Inflation risks that have prevented the Czech central bank from starting interest rate cuts have been gradually disappearing, central bank board member Jan Prochazka said on Tuesday, ahead of the bank board's last policy session this year on Dec. 21.
With inflation easing, attention has turned to the Czech central bank to see when it may begin an interest rate easing cycle, as its counterparts in Hungary and Poland have already done.
Markets have been pricing in a near-term lowering in the main Czech repo rate, which has stood at 7% since June 2022 when the board last tightened policy.
The board voted 5-2 to keep rates steady at the last policy meeting on Nov. 2, with Prochazka voting with the majority and the minority wanting a 25 basis point cut.
Prochazka said central banks remained in a fog, and their past policy tightening was not showing such strong effects on economic output and the job market as they did in the past.
While he could not say now how he would be voting next week, a number of issues preventing a rate cut have dissipated, including the fact that major central banks have completed their upward rate path and market attention was turning to cuts.
"This has changed in the past month and a half, the rhetoric is clear," Prochazka told Reuters. "For me one of the risks, decision-making by (major) central banks, is certainly receding."
Oil prices have also developed favourably, he said.
The Czech central bank has managed its communication well around a temporary spike in inflation this autumn caused by the base effects of aid to households with energy costs last year, Prochazka said.
Price developments have also been in line with forecasts.
"I have been gradually ticking off the risks," Prochazka said.
Early data on how the Christmas season was going for retailers would be important for the Dec. 21 meeting, he said, adding that there were no signs of a buying frenzy, with household spending remaining suppressed.
Prochazka said he expected companies to have limited room for annual markups in January, and he was confident in the bank's forecast of a 2% monthly price increase in the month.
The size of January repricing is among the main risks mentioned by central bankers and analysts as a factor for possibly pushing the first rate cut beyond the New Year.
There will be "big debate" on Dec. 21 as to whether to start or not, Prochazka said.
"Waiting until February may create the impression that we are not sure that we will deliver around 3% (inflation in January). And I am convinced that we will deliver that.
"If we are convinced (by data), then first slow, small lowering (in December) may also be a signal of self-confidence."
He said he also saw signals companies would be moderate in raising wages, another major factor for the central bank in a tight labour market with unemployment at just 3.5% in November.
Czech inflation peaked at 18% in September 2022. It stood at 7.3% in November, and is expected to ease to 3% in January as base effects wane, before edging closer toward the bank's 2% target.