Central banker favours June liftoff for Czech interest rates

Bloomberg

The Czech Republic should kick off interest-rate increases this month to prevent the factors driving global inflation from sending consumer prices spiralling out of control, central banker Tomas Holub said.
The country is among a handful of EU states taking a hawkish stance in debate over whether surging inflation is temporary and outside of central banks’ influence or a more durable threat requiring tighter monetary policy. In bloc’s east, Hungary has a similar view, while Poland is betting that price pressures will abate and no action is needed.
While the current spike in global prices is driven by temporary factors such as supply bottlenecks, there’s “a growing risk of a spill-over into inflation expectations” that the central bank needs to address, Holub said in an interview last week. A local shortage of workers is driving wage growth and keeping consumer inflation around the top of the 1%-3% tolerance range.
But the economic outlook has become more optimistic after a tight lockdown and an accelerating vaccination campaign helped the country overcome one of the world’s deadliest Covid-19 outbreaks. That’s allowed the central bank to reassess its cautious approach as risks of a premature rate hike undermining the recovery have eased, Holub said.
“Here I can see the biggest shift, and I myself am surprised by how quickly it happened,” he said. “Speaking for myself, I’m currently leaning toward a hike in June. I don’t see many reasons to postpone this until August.”
The central bank will next decide on rates on June 23. Holub, who once ran central bank’s forecasting team, expects the bank to revise its growth outlook for 2021 up to “somewhere around 2.5% or more” after the economy fared better than expected in Q1 and the pace of easing lockdown restrictions quickened.

The coronavirus crisis has cooled the labour market much less than the bank had anticipated, partly due to massive government spending but also because of an acute labour shortage that existed before the pandemic.
It’s the central bank’s responsibility to make sure short-term price swings don’t transform into longer-term risks on the domestic front in the form of demands for higher wages and other inflation pressures, according to Holub.
“I obviously don’t know how the majority of the board will vote, but already in May the debate had a bigger tilt towards starting monetary-policy normalisation than I’d expected,” he said. “So a hike in June is definitely not certain, but I find it realistic.”
Another argument supporting monetary tightening is the outlook for a later unwinding of the budget stimulus than the bank originally assumed. Holub sees at least two hikes this year, but the further pace will depend on many factors, including the exchange rate, whose strength is now mitigating the impact of higher import prices.
“The forecast for the speed of monetary-policy normalization is still rather hawkish, and I can imagine us proceeding more slowly,” he said.