Our almost seventeen percent inflation continues to reach dizzying heights. However, the Central Bank, headed by Governor Aleš Michl, is convinced, with one exception, that raising interest rates is not necessary, and inflationary pressures are mitigated by a strong koruna. Vice-governor Eva Zamrazilová often speaks publicly about her refusal to tighten monetary policy. She claims that higher rates will go against domestic companies, which cannot afford the now more favorable euro loans. These statements raise questions as to whether the members of the bank board are deviating from their mandate by acting in a similar manner and whether they are fulfilling their mission, i.e. taking care of price stability.
Michl claims that the bank would raise rates if wages rose significantly. “At the next meeting, the Central Bank will also decide whether to keep interest rates at their current levels or increase them. I consider the market’s expectations of a rate cut to be premature. If we see signs of a spiraling wage spiral, we will raise rates,” the governor says, admitting that the inflationary risks here are significant and work both ways.
“Pro-inflationary risks are fiscal policy, wage growth and unmooring of inflation expectations. Anti-inflationary risks are also higher than the expected decline in domestic and investment demand,” said Michl. The only member of the bank board who has now voted for a rate increase by a quarter of a percentage point, and who thus remains the only “hawk”, is Tomáš Holub.
The governor and other members of the bank board otherwise persistently assure that inflationary pressures are dampened by a strong koruna, which allows them to keep rates unchanged. A strong koruna favors importers, but on the other hand, disadvantages exporters.
It is quite steep in its own way expressing sto the public Vice-governor Zamrazilová. She claims that the CNB cannot afford to further tighten monetary policy, i.e. further increase rates, as this would harm local small and medium-sized enterprises, making loans more expensive for them. Unlike corporations with foreign owners, smaller domestic businesses cannot afford more favorable financing in euros, which Zamrazilová considers an unfair situation.
According to the Constitution, the main mission of the CNB is to care for price stability. It is therefore up to one to consider whether Zamrazilová’s statements should not be interpreted as favoring domestic entrepreneurs at the expense of households and ordinary savers, whose money is further devalued, and whether such actions can be characterized as fulfilling care for price stability.
“The CNB is taking risks, the fight against inflation has been lost”
According to David Marek, Deloitte’s chief economist and now also the economic advisor to the newly elected president, the CNB has not been making a good monetary policy for more than half a year. “I fully agree with the opinion of Tomáš Holub, Marko Mora and the International Monetary Fund that it would be more responsible to play it safe so that we really achieve stable and low inflation close to the inflation target of two percent in the foreseeable future. CNB has bet on a different card and is running the risk of not succeeding. So it is possible, perhaps even probable, that we will reach low inflation in the foreseeable future through this route as well. But the risk that it will not succeed is definitely higher than if the CNB continued to raise interest rates in the second half of last year. The changed bank board refused this and, in my opinion, unnecessarily risks one of the pillars of the macroeconomic stability of the Czech economy. This means low inflation,” Marek expressed in the Weekly Echo.
Inflation should reach an average of just over 10 percent for the whole year. According to material on the inflation expectations of the financial market, analysts assume that inflation could then reach the level of 3.7 percent in a year. The latest forecast of the central bank then predicts total inflation for the year 2024 of just over two percent, i.e. almost at the inflation target.
According to investment banker Ondřej Jonáš, this is completely out of the question and points out that the market does not trust the Czech central bank, which means a loss of confidence that we will be able to maintain normal prices. This is evidenced by high inflation expectations, when we now have an interest rate on a ten-year bond of 4.8 percent. “Therefore, inflation expectations in our country are hovering around the five percent mark, which already significantly exceeds the two percent target. We suffer from expensive money, high interest rates. The credibility of the Czech central bank is on the table, the fight against inflation has essentially been lost,” he said in an interview with Echo24.
On the contrary, Česká spořitelna’s chief economist Michal Skořepa is more lenient and claims that the vice-governor’s statements are “completely appropriate” because she is trying to describe her thinking in more detail, thus fulfilling the requirement for transparency of an independent central bank. “Of course, this does not necessarily mean that we have to agree with the conclusion of the vice-governor that a further increase in interest rates was not necessary in recent months and is not necessary now,” Skořepa told Echo24.
“I understand Vice-Governor Zamrazilová’s words to mean that it was not a matter of favoring any part of the Czech economy, but only a concrete description of the way in which she tries to find an appropriate mix of the level of interest rates and pressure on the exchange rate in her monetary policy decision-making so that, from her point of view, the result the most reasonable compromise between the fight against inflation and maintaining the viability of companies operating in the Czech Republic. Here it must be borne in mind that every citizen of the Czech Republic is, on the one hand, a consumer who has been more or less suffering from the rapid rise in prices for many months, but on the other hand, he is also directly or indirectly dependent on his income on the condition in which he is and will be here economy,” claims Skořepa.
As for the forecast for falling inflation, the main thing will be the pace. Some analysts believe that subdued household consumption will contribute to lower growth, which should also be transmitted to the development of food prices. The further development of energy prices and the already mentioned exchange rate of the koruna will also play a role.
