Czech Policymaker Touts Inflation Buffer to Shield Oil Shock

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(Bloomberg) — The Czech central bank can wait out a global surge in oil prices without raising interest rates because inflation will likely stay under control even with higher fuel costs, according to board member Jan Kubicek.

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While the Middle East conflict has pushed the oil price considerably higher than Czech officials had assumed in their forecast, longer-term oil futures jumped far less and indicated that commodity markets are treating the current situation as temporary, Kubicek said. 

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“For now, this is leading me to believe that the impact on inflation will be transitory,” he said in an interview on Tuesday, about a week before the March 19 policy meeting. “At the moment, I am satisfied with the rates where they are.”

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While fuel prices will inevitably increase, Czech headline inflation is running significantly below the core gauge and gives a “relatively large buffer” to absorb the oil shock, Kubicek said. That should keep overall price growth “comfortably inside the target range” of 1%-3%.

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Central banks around the world are weighing the impact of surging energy prices as they pose a fresh inflationary risk while also threatening economic growth. The Iran war and its impact on consumer price growth risk forcing the European Central Bank to raise interest rates sooner than anticipated, Governing Council member Peter Kazimir told Bloomberg on Tuesday. 

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For the Czech policymaker, the immediate impact is less relevant than the so-called second-round effects of higher energy costs spilling over into transportation or industry prices. Whether that happens will depend on how long oil prices remain elevated, but Kubicek said he currently doesn’t see a significant risk of it occurring. 

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The US-Israeli strikes on Iran have roiled world financial markets and triggered volatility in Czech interbank rates. Investors quickly reversed bets on a rate cut and as recently as Monday priced in the likelihood of more than two hikes within a year. Kubicek said he found such a sharp spike “overdone.” 

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Market rates dropped following US President Donald Trump’s comments that the Iran war may end “soon,” with Czech forward-rate agreements showing expectations of a single quarter-point increase over the next 12 months as of Tuesday. They rose again on Kazimir’s comments, only to pare some of that advance later on Wednesday.

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Czech central bankers have held the benchmark rate steady at 3.5% since the last cut in May. Before the outbreak of the Iran war, policymakers were discussing potential further easing. 

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The Czech koruna has endured the market turbulence better than its regional peers. It traded up 0.1% against the euro at 2:49 p.m. in Prague, curbing a decline of 0.5% from the start to hostilities, compared with a 2.7% slide for the Hungarian forint.

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Although all central bankers agreed to disregard the one-off impact of the government’s move to lower electricity prices, Kubicek said some board members may have considered the benchmark rate as overly restrictive given the low headline inflation figure.