After about thirteen years, the Czech Republic will experience an almost unexpected, but prayed-for phenomenon. In an optimistic scenario, the rate of inflation in the country will fall below the level of the Czech National Bank’s rates this month, i.e. below seven percent. At least for domestic banks, this will mean the de facto end of the inflationary era. Because the billions deposited with the central bank will start to earn them more than inflation does. Ordinary people, for whom seven percent on any type of account is just a utopia, can only symbolically open a little champagne, because the era of permanently low prices will not come anytime soon. “The January revaluation will be key. Its effect will be the main one, after three autumn months of stronger inflation, January will come, when we expect a drop in inflation. The level at which inflation will start next year will have a statistically significant effect on inflation for the rest of the year as well,” says Jan Procházka, councilor of the Czech National Bank.
From your desk, you look at your own likeness in a sweater stitched in equal proportions of hawk and dove feathers. Is this a reflection of your rejection of the traditional division of roles into softer and harder central bankers?
After all, this setting is a bit of a thing of the past. Everything changes quickly, and when history evaluates which attitude and approach was dovish or hawkish. Just as the right-left political scheme has all but disappeared, so has the division of central bankers. But fortunately, unlike politics, populism does not win here. What used to be strictly given is now more flexible. In addition, I am only here for a short time in one part of the cycle. Some people think that someone who came from business will be more of a dove, on the other hand, someone who has been modeling for a long time will be more of a hawk, but it doesn’t work that way. A number of new procedures are emerging.
Do you mean, for example, an innovative approach to the management of monetary policy in the style of orientation by the stars, as stated recently in Jackson Hole by the head of the American Fed, Jerome Powell?
He also said that data is important for decision making. This is what the bankers would have told you clearly in the past, that as a central banker you have to look ahead and not wait for the data. And they would tell Mr. Powell, but also Ms. Lagarde, that they are doing it wrong. You must always be ahead of the cycle and look ahead. It’s a strange time now, when even the big bankers are using things that belong in that vocabulary quite complexly.
I’m almost starting to worry about the fate of global inflation now. Doesn’t this create a rather dangerous climate in monetary policy?
No, they may have realized some things later in this inflationary episode. Now the worlds are being compared, meaning our Czech and perhaps European. We are currently helped by the fact that the European Central Bank (ECB) is raising rates. It helps us curb so-called import inflation. And they are saying what my colleagues have said before, that higher rates need to stay longer. I’m not saying they’re copying from us, but this statement is being heard almost everywhere now.
CNB was the first to raise rates in Europe and will probably be the first to lower them. Part of the market and your model are waiting for rates below six percent until New Year’s Eve. What do you think?
Thanks to Poland, we won’t be the first. A few weeks ago, markets were pricing in three rate cuts by the end of the year. We have repeated that we do not see it that way, and the current expectations of the market show that they are already reading us correctly. Investors now expect that there will be one reduction towards the end of the year, or at the start of the next one, which is no longer contradictory to our statements.
So is that the most likely option?
I’m not saying that, I’m just saying that the markets are better at reading our verbal interventions. Because we have repeated several times that we will be very careful. Because the imaginary last mile of the fight against inflation is always the hardest, and there are many reasons to keep rates at this level. The inflationary burden in the economy is still very strong.
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2023-09-12 03:00:00
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