Czech Policymaker Says Hike Likely Next Move But No Need to Rush

wmpi]r3ri[2cv)6wal39}vug_media_dl_1.png Czech Statistics Office, Czech N

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(Bloomberg) — A senior Czech central banker downplayed any possibility of imminent monetary tightening in a reaction to a surge in oil prices, though acknowledged an increase in interest rates now appears to be the more likely next change in policy.

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While officials had been open to discussing a further cut in the benchmark to 3.25% earlier in the year, the Iran war effectively ended such considerations with money markets now indicating bets on more than three quarter-point hikes within a year. But Deputy Governor Eva Zamrazilova joined colleagues on the Czech National Bank board saying there is little pressure to hike right now. 

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Headline inflation remained below the 2% target last month, despite an acceleration due to more expensive fuel. Government measures helped limit price increases at the pumps, suggesting that any monthly increase there will be smaller in April and overall inflation is likely to be only slightly above target, according to Zamrazilova.

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“I really think that we are in a quite comfortable situation for now,” she said in an interview on Wednesday before the next policy meeting on May 7. “Inflation is still expected to remain inside the tolerance range within the policy horizon even if we don’t react with rates in the near future.”

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A smaller April rise in fuel costs also means potentially smaller second-round effects on other consumer prices, Zamrazilova said. Services providers in March didn’t indicate an expected increase in their prices for the next three months and the retail sector also mostly saw price stability, though the central bank needs to remain cautious about the pass-through of more expensive energy into core inflation, she added.

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Deputy Governor Jan Frait said this week that the officials aren’t under major pressure to raise rates immediately as the central bank has kept “relatively tight” monetary policy with positive real rates recently. Board member Jan Kubicek also told the MF Dnes newspaper earlier in the month that no tightening was imminent.

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“Now it seems that the next step with rates would more likely be in an upward direction,” Zamrazilova said. “But we are in a comfortable situation now and there is no reason to act quickly.”

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For her, a potential reversal in food prices is now a bigger concern than the pass-through from energy prices into core inflation. Food items — which have a significant weight in the consumer basket —  might stop having a dampening effect on headline inflation from around the middle of the year, the deputy governor said. 

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The central bank’s next forecast will probably show slower economic growth than previously expected and a higher inflation projection, she said. Still, the growth revision might not be as significant as the cut in the Finance Ministry’s GDP forecast to around 2%.

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The economy is growing without major imbalances, consumer demand has recovered and was later followed by a rebound in investments, Zamrazilova said. Another factor could be the high potential of the Czech defense industry. 

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“I’m not happy about geopolitical instability, but it’s a fact that the current developments are intensifying investments in defense industries,” she said. “This, in turn, is favorable for Czech exports.”