Europe May See Rate Hikes in 2021 as Czechs Mull Tightening

The Czech Republic may raise interest rates as many as two times this year, central bank Governor Jiri Rusnok said, departing from the global trend of pursuing ultra-loose monetary policy against the Covid-19 crisis.

Rusnok, speaking in an interview, said he sees economic growth picking up in the second half of the year, partly due to progress on vaccinations. He said unemployment, which is the European Union’s lowest, is also expected to remain subdued and keep pressure on consumer prices.

Like other nations across Europe, the Czechs have locked down their retail and hospitality industries to get a grip on the pandemic. The export-dependent economy is selling cars, electronics and other goods everywhere from Germany to China to drive economic growth.

Europe May See Rate Hikes in 2021 as Czechs Mull Tightening

“We will tread very cautiously to make sure we don’t undercut the fragile economic recovery by acting too early or tightening monetary conditions too fast,” Rusnok said in an interview on Monday. “Other than that, the outlook for gradual rate hikes is still valid and we’ll be mainly fine-tuning the timing.”

The koruna gained 0.2% against the euro after Rusnok’s comments as the money market began pricing in a higher likelihood of rate hikes.

Czech policy makers differ from their counterparts in the euro area and central Europe, who are extending monetary easing to support growth and maintain low government financing costs.

Read more: Czechs Cede Debt Aversion With a Repeat of Record Deficit Target

The nation of 10.7 million still has more available jobs than people seeking work and an aging population, which has kept price growth above the central bank’s 2% target. The labor shortage is driving up salaries and won’t disappear when the government ends relief programs, according to the governor.

“We entered the crisis with a very dynamic economy that even showed some signs of overheating, especially in the labor market and to some extent in real-estate prices,” he said. “So our inflationary potential is incomparably higher than in the euro area.”

Still, a stronger koruna and risks to the recovery mean rates probably won’t rise three times this year as implied in the central bank’s November projection, said Rusnok.

“The pace of rate normalization could be roughly in line with our forecast, but the whole process will be slightly delayed in time,” he said. “I don’t know if we’ll do zero, one or two hikes.”

Europe May See Rate Hikes in 2021 as Czechs Mull Tightening

The Czechs stand out in Europe by rejecting unconventional monetary tools. Relatively low public debt and surplus bank liquidity are helping finance record budget deficits without quantitative easing.

While the government’s longer-term debt yields have jumped the most in Europe over the past three months and are higher than in junk-rated Greece, Rusnok doesn’t see a need for the bank to start asset purchases. Yields are still low, with negative real interest rates that are below those in the euro area, he said.

Policy makers are debating non-standard tools to have them ready if needed, but they’d only use them to fulfill their goal of safeguarding price and financial stability, according to the governor.

“It’s not a taboo for us,” he said. “But it certainly isn’t something that we would be thinking about as a policy move in the foreseeable future.”

©2021 Bloomberg L.P.

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