Interview of Eva Zamrazilová, CNB Deputy Governor
By Jan Lopatka (Reuters, 17. 6. 2024)
Czech central bank Deputy Governor Eva Zamrazilova will decide between a 25 basis point and a 50 bp interest rate cut at next week's policy meeting, she said, weighing up the effects of a firmer crown versus still strong growth in services prices.
Zamrazilova joins Governor Ales Michl and board member Tomas Holub in saying the bank will consider maintaining its 50 bp pace of easing on June 27, even as markets price in just a 25 bp cut to the two-week repo rate which is currently at 5.25%.
Investors have scaled back rate cut expectations, now seeing 100 basis points of easing by year end. That has supported the crown which is trading near its strongest level since early January.
Zamrazilova told Reuters the latest current account data from April pointed to a stronger exchange rate.
“A stronger crown would rather be an argument for a larger drop in interest rates, on the other hand the risks in services prices are an argument for a smaller drop,” she said in an interview on Friday.
The bank has lowered its main interest rate by 175 bps since December, including three 50 bp cuts in a row.
Borrowing costs had risen to their highest in more than two-decade highs prior to that as inflation surged and crushed consumer spending.
Consumer demand is growing again as real wages return to growth. Inflation slumped at the start of the year but rebounded to 2.6% in May.
Zamrazilova said the more than 5% growth in the price of services remains a concern.
“You often have smaller entrepreneurs – hairdressers, beauticians, pub owners – who have gone through the horrific experience of COVID and they try to create a buffer for worse times by raising prices more than they would have to.”
On wages, the 7% first-quarter nominal growth was not a big inflation concern, Zamrazilova said, because median growth was slower, with rises concentrated in higher-earning groups which are less likely to react by spending more.
The fiscal deficit remained a longer-term upside risk for rates but was not a factor in immediate decisions, she said.
While the central bank has said delays to rate cuts by major central banks and the impact on the exchange rate are a key factor that could slow Czech rate cuts, Zamrazilova said she saw more price risks at home than abroad.
Investor confidence was more important for markets than the interest rate differential, she added.
Further easing beyond this month was probable, Zamrazilova said, but declined to say where she thought rates would be at year-end, adding she would consider each step based on fresh data.
“It does not make sense to needlessly strangle the economy with high rates,” she said. “I will strive for the least restrictive monetary policy while sufficiently covering the inflation risks.”