Czech Rate-Hike Drive May Be Over for a Year, Rate Setter Says

(Bloomberg) --

Czech interest rates could stay where they are for another year as global risks cloud the outlook for the export-oriented economy, a senior central banker said.

Unlike monetary easing deployed by the U.S. Federal Reserve and the European Central Bank, Czech policy makers are among the few in Europe discussing whether or not to raise borrowing costs. Still, after delivering eight hikes in two-and-a-half years, the bank held fire its last four meetings because of a slowdown in the country’s main trading partners.

Above-target inflation will probably keep the rate-hike discussion alive at the Dec. 18 meeting. But weakening manufacturing orders signal that negative sentiment is spilling into the economy, while geopolitical risks support a cautious approach, Deputy Governor Tomas Nidetzky said in an interview.

“When uncertainties are as significant and as unpredictable as now, it doesn’t make sense to make policy changes,” Nidetzky said on Monday. “We’ve taken a time-out. It’s not a reversal of the policy direction.”

Nidetzky spoke before data showed inflation unexpectedly accelerated in November, driven by housing and food costs and breaching the upper limit of the bank’s 1%-3% tolerance band for the first time in seven years.

Slam the Brakes

But the deputy governor said price growth temporarily exceeding 3% shouldn’t be a reason to raise rates now because doing so would take months to filter into the economy.

He doesn’t see the risk of overshooting the tolerance range over the long term and considers inflation expectations well anchored.

“I can’t imagine what an increase would have given us now when our forecast implies a rate reduction just half a year later,” Nidetzky said. “It wouldn’t make sense to slam on the breaks now and then accelerate again.”

By holding rates in November, the policy panel disregarded staff projections implying one rate hike this quarter, followed by another from January to March.

Nidetzky, one of five board members who outvoted two rate-seeking dissenters last month, argued against automatically following the forecast, saying it’s not able to fully capture uncertainties created by things like trade wars or Brexit.

He said he “wasn’t comfortable” seeing the forecast projecting a rate hike followed by a reduction in a relatively short period of time. It means that barring any major shocks, rates could remain unchanged throughout the next year, according to the deputy governor.

“I consider stable rates as the most appropriate path,” Nidetzky said. “There is value in this stability. I think we would be less credible if we increased rates now and then lowered them back half a year later.”

To contact the reporters on this story: Peter Laca in Prague at placa@bloomberg.net;Lenka Ponikelska in Prague at lponikelska1@bloomberg.net

To contact the editors responsible for this story: Balazs Penz at bpenz@bloomberg.net, Michael Winfrey, Andrea Dudik

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