Interview of Jan Frait, CNB Deputy Governor
By Krystof Chamonikolas and Michal Kubala (Bloomberg 23. 7. 2024)
The Czech central bank is likely to scale back the pace of interest-rate cuts soon, but a senior policymaker refused to rule out a final half a percentage point move next week.
After lowering borrowing costs in 50 basis-point steps at the past four policy meetings, the central bank is “approaching the point at which fine-tuning begins,” Vice Governor Jan Frait said in an interview on Monday.
While inflation unexpectedly slowed in June to reach the 2% target, lingering price pressures in services and housing are a reason for caution, he added.
“It is clear that the main focus of the debate on Aug. 1 will be a 25 basis-point cut,” Jan Frait said. “On the other hand, the latest inflation print was very low, which is reopening the question of whether there perhaps still is room to do another 50 basis points. I personally will be deciding between 25 and 50 basis points.”
Policymakers in Prague are anticipating that the rapid drop in funding costs over the past seven months and a recovery in real wage growth will gradually help pull the economy out of two years of stagnation.
Still, they want to avoid a resurgence in inflation, which peaked at 18% in 2022 and plunged the nation into its worst cost-of-living crisis in three decades.
That cautious approach would allow the central bank to cut its benchmark from 4.75% now to around 4% “give or take 25 basis points” by the end of the year, on top of a cumulative 225 basis points of easing so far, according to Jan Frait.
The 58-year-old vice governor has worked at the central bank for almost a quarter century, and is currently serving his second six-year term on the policy board.
For now, household consumption, investment activity and demand for Czech exports remain weak, and as such are “not generating substantial demand-led inflationary pressures,” he said.
Jan Frait described elevated growth in the prices of services as a “temporary phenomenon that reflects supply-side factors” rather than strong consumption trends.
“I believe this segment of inflation will gradually reach some normal levels,” he said. “We clearly have room to keep going down with interest rates.”
Other Comments
On labor market
The labor market “remains relatively very tight”.
“That is one of the reasons to proceed cautiously and hold rates at a higher level than the basic model projections would imply.”
On koruna
Signs of gradual economic recovery, current-account trends and expected monetary easing abroad mean that “the koruna may be a bit weaker than fundamental factors would imply.”
“That is another argument not to be afraid to cut rates, knowing that over time the exchange rate will perhaps tighten monetary conditions. So I personally wouldn’t be afraid of another 50 basis-point cut.”
On housing market
While growth in residential real-estate prices is a “pro-inflationary factor, ”the central bank can see “no apparent boom or something that we should be worried about.”
“It’s something we’re taking into account as a reason to avoid having a substantially relaxed monetary policy. On the other hand, it’s not something that should significantly hold us back at the current level of interest rates.”
On neutral rate
Policymakers recently decided to keep the so-called neutral rate at 3% in the central bank’s model, although most of them feel a slightly higher level would currently be justified.
“We more or less agree within the bank board that the events of the past two years are conceptually pushing the neutral rate slightly higher rather than lower.”
“If by any chance we were to undershoot the 2% target for some time, and assuming this is not caused by some dramatic drop in demand, we definitely wouldn’t be worried about that.”