Dovish Global Turn Is Failing to Quash Czech Rate-Hike Debate

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New monetary stimulus from central bankers in the U.S. and the euro area isn’t stopping their Czech peers from at least contemplating the possibility of further raising borrowing costs.

After eight interest-rate hikes in two years, the Czech National Bank will keep discussing if further tightening is needed to curb above-target inflation, according to board member Tomas Holub.

While rate cuts at some point in the future can’t be ruled out, the likelihood is lower than money-market bets suggest, the 45-year-old policy maker said in an interview on Monday.

“I can’t imagine we would now debate whether to hold or cut rates -- the discussion will still be whether to hold or hike,” Holub said. “I personally believe that rate stability is the appropriate reaction to the overall situation, but the debate will remain slightly skewed toward the upside.”

The Czech government has gotten behind the push to avoid the slowdown abroad from creeping into the domestic economy, approving a 2020 budget draft with a $5 billion spending boost for higher pensions, public salaries, and infrastructure spending.

That came after Czech policy makers left borrowing costs unchanged at their past two meetings, as global risks countered resilient domestic price pressures driven by record-low unemployment, rapid wage growth, and a weak koruna exchange rate.

“We’re simply above the target and we have to talk about how and when we’ll bring inflation down to 2%,” Holub said. “The question is whether we need further policy tightening, or whether our external environment is restrictive enough to bring us back to target.”

At its next session on Sept. 25, the seven-member board will review fresh data, including August inflation that exceeded the central bank’s projections and stayed near the top end of its 1% to 3% tolerance band.

Holub, who was the central bank’s chief economist until 2018, sees the global slowdown as being anti-inflationary enough to curb Czech price growth without changing monetary policy.

Provided the world economy doesn’t deteriorate further, the koruna remains relatively stable and fiscal policy provides stimulus, the Czech central bank may not need to cut rates throughout the slowdown, Holub said. It could then resume raising rates once the European economy recovers.

The recent dovish turn by the U.S. Federal Reserve and the European Central Bank has prompted money-market investors to bet that the ex-communist country will soon join them. Bank of America Corp. last month predicted the Czech Republic would lower the benchmark to 1.75% from 2% at the start of 2020.

“It seems to me that the Czech yield curves are quite mechanically reflecting the outlook for monetary policy abroad, which is obviously important for us, but we now seem to have slightly more autonomy than we used to,” said Holub. “So whatever the ECB does, we don’t necessarily have to follow suit.”

To contact the reporters on this story: Krystof Chamonikolas in Prague at kchamonikola@bloomberg.net;Lenka Ponikelska in Prague at lponikelska1@bloomberg.net

To contact the editors responsible for this story: Peter Laca at placa@bloomberg.net, Michael Winfrey, Andrew Langley

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