Dovish ECB Renders More Czech Rate Hikes Pointless for Michl

(Bloomberg) -- The Czech central bank should refrain from further interest-rate increases for now, as the export-oriented economy braces for a global slowdown and monetary easing abroad, according to board member Ales Michl.

One of the biggest advocates of raising borrowing costs early this year now says the country needs a longer period of stable rates as inflation is under control and Czech companies are experiencing a drop in foreign demand.

“I think the economy now needs to be left alone, with no activist policy,” Michl said in an interview in Prague on Tuesday.

His view underscores the central bank’s recent turn toward caution as the global economy grapples with trade wars and a slowdown in China, prompting major central banks to ready fresh stimulus. Prospects of a new wave of quantitative easing in the neighboring euro area have compressed Czech longer-term borrowing costs below the key two-week repo rate, limiting the effectiveness of local policy.

The central bank will make its next policy decision on Aug. 1, after it raised its benchmark eight times over the past two years but kept it at 2% at the last meeting in June.

“The ECB’s outlook is disrupting the transmission between our policy rate and long-term interest rates, which makes me worried as a person fighting against potential asset bubbles,” said Michl, 41. “A hike would only make Czech companies’ operating financing needlessly more expensive.”

The economist and former fund manager previously advocated tighter monetary conditions as a way to help cool the housing market and prevent excessive private borrowing. He warns against following the example of Sweden, where he says high household leverage is tying central bankers’ hands because any rate hikes could trigger delinquencies and hurt the banking industry.

“A prolonged period of zero or negative interest rates is wrong, because it discourages people from saving,” said Michl. “I believe we should be like Germany, an economy based on savings rather than debt.”

Michl’s concerns about the housing market have eased after the central bank imposed a range of measures, including higher capital buffers for lenders and recommended limits on the size of home loans. He said the mortgage industry is undergoing “a healthy sobering up.”

After the last meeting in June, the central bank reiterated its outlook for rates remaining stable until about mid-2020 and said the next move could be either up or down. Next week, the seven-member policy panel will review fresh staff forecasts that will update the monetary authority’s existing projections from May.

“I expect the new forecast to be similar to the previous one,” said Michl. “Maybe I would be able to find in it a justification for another hike now, but then the forecast would imply cuts in a year or later. So I believe it’s better to smooth it out.”

To contact the reporter on this story: Krystof Chamonikolas in Prague at kchamonikola@bloomberg.net

To contact the editors responsible for this story: Blaise Robinson at brobinson58@bloomberg.net, Peter Laca, Michael Winfrey

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