Interview of the Deputy Governor Tomáš Nidetzký
By Krystof Chamonikolas and Peter Laca (Bloomberg 25. 1. 2022)
The Czech Republic’s aggressive monetary-policy tightening aims to curb inflation quickly and send a signal that borrowing costs will remain high for as short a time as possible, according to a deputy governor.
After lifting interest rates by a total 3.5 percentage points since June, policy makers are likely to add at least another half-point next week to bring the benchmark rate above 4%, Tomas Nidetzky said in an interview on Monday. In his view, the main rate could then peak at “around 5%” this spring.
“We want to hike as fast as possible to avoid being behind the curve, but we don’t want to expose the economy to high interest rates for too long,” Nidetzky said.
If inflation moves on to a clear downward path as the central bank forecasts, it could enable monetary easing as early as toward the end of this year, he said. The Czechs, together with Hungary, were the first European Union central banks to start hiking rates last June. Other countries in the region, including Poland and Romania, have been tightening monetary policy at a much slower pace. The nation expects price growth to accelerate to about 10% in the first months of this year, the fastest pace in two decades. While part of the increase is due to rising commodity and energy costs, policy makers in Prague are also grappling with strong pressure from a sustained shortage of labor and an overheating real-estate market. The central bank is trying to tackle those domestic factors with the biggest rate hikes since it began targeting inflation in 1998. A fresh staff forecast, which will be unveiled at the Feb. 3 policy meeting, will probably outline faster price growth for this year and show a return toward the 2% inflation target around mid-2023, according to Nidetzky. “Inflation remains the No. 1 economic story,” the 51-year-old deputy governor said. “This is not the time for the central bank to be idle or adopt a wait-and-see approach.” The new government’s plans for cutting budget deficits won’t have a significant impact on inflation before 2023, Nidetzky said, while the shortage of chips for the key automotive industry, and other supply bottlenecks, are likely to persist this year.
Hiking ‘Not Painless’
Given the high level of uncertainty and persistent inflation risks, price growth could turn out to be more resilient than the central bank anticipates.
“The question is what we should do if inflation still isn’t coming down as quickly as we want even with rates around 5%,” said Nidetzky. In that case, he’d be “reluctant to do more steep hikes” and would instead prefer to keep the economy exposed to higher rates for longer to secure price stability. With the lowest jobless rate in the EU, one of the policy goals is to make sure that workers and businesses don’t perceive the current trend of elevated inflation as a long-term phenomenon during wage negotiations, Nidetzky said. After the main interest rate rose above the so-called neutral level in December, the economy is already responding to policy tightening. This is reflected in the koruna appreciation early this year, while local lenders are also raising their interest rates.
“I know that raising rates is not painless,” Nidetzky said. “But I really believe it would be a mistake if we gave up on our price-stability mandate just because monetary-policy tightening is unpopular.”