Why is the CNB raising interest rates?
Because inflation in the Czech Republic is rising really fast and is not just imported. There is no choice but to raise interest rates above neutral levels and tighten monetary policy. There is no other way to respond to the very rapid inflation that the CNB expects next year.
Why did she increase them by so much? The increase was larger than expected.
The CNB sees more significant pro-inflation risks, meaning that inflation will start at number eight. In its November forecast, the CNB expected inflation to be below 7 percent. The koruna is also strengthening less than the CNB expected. Thus, imported inflation is not even slowed down by the strengthening koruna. This is reflected in further tightening in the labor market; wage growth also exceeded the CNB’s expectations. Although household consumption is the largest source of growth for the Czech economy in recent months, this unfortunately means that there is open pressure on price growth.
Through the governor’s eyes: When will inflation end?
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Wasn’t the increase late?
I would rather criticize the CNB for the period before the covid. If we look at inflation rising before the covid, we see that inflationary pressures were already manifesting at that time and wages were rising faster than labor productivity, as were property prices. At that time, the CNB was very reluctant to raise rates, even though the market called. This contributed to inflation. Inflationary pressures accumulated before the covid, the covid dismissed them. With the opening of services this summer, companies have come under multi-layered pressure, unlike competitors in Europe. Over the last six years, unit labor costs have risen by 30 percent, in Germany by 14 percent, this must have manifested itself. In addition, labor productivity has not doubled than in Germany. All this has created cumulative inflationary pressures. Czech companies are in a very difficult situation, when their import prices are rising, which are rising for everyone, but their wage costs are still rising.
It is estimated that inflation could be double-digit. So do you expect a further increase in interest rates?
Yes. I think that the CNB will raise interest rates again in February, we will most likely get above four percent, the highest rate since 2001. We will therefore overcome interest rates from the crisis in 2008.
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Where will the rate increase affect and how strongly?
It will be seen in loans, especially those that have not been fixed. Those who have a fixation from this year will be affected, especially for consumer loans. For households, this will result in problems in obtaining housing. Loans will also make companies more expensive. But they still have to invest because they face staff shortages, so they have to automate and robotize, despite interest rates. Therefore, there will be fewer projects, especially from the beginning of the year it will dampen demand for credit.
So will it slow down business investment?
In the first half of the year, yes. But there is a National Recovery Fund that will support investment. The need for companies to respond to the shortage of people and materials will make them have to invest in technology. They can’t fall asleep, because the competition doesn’t sleep. Companies will look for ways to invest. It shows that many companies have enough deposits. They make investments often, regularly and from their own resources.
So don’t you expect many companies to fall next year, for example, combined with high energy prices?
It will not be an easy year. Extreme cases can occur in energy-intensive industries, such as bakery or steel, for which this will be very difficult. But for the whole economy, energy growth should be a temporary thing. So it is a matter of surviving the shock period, energy prices should not continue to rise at this rate. This should allow companies to adapt, so I don’t see area problems that would cause area bankruptcies. If it fails to dampen inflation expectations and convince employees that wage bargaining must also be within some standards, it will be a big struggle for companies.
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So can’t the results of the rate hike do more harm than good? Inflation is partly imported.
In this situation, we are already holding back the economy, it is desirable, especially in terms of consumption. This is at the pre-pride level, unlike industry and exports, which are affected by the supply chain crisis. In my opinion, it would be worse if we kept inflation high and pretended that nothing was happening. That is, letting inflation and wage expectations be anchored at high levels for a long time. Shock therapy with a rapid rise in interest rates is a better strategy than a slow, painful several-year cooling of the economy. It may well be that at the turn of 2022 and 2023 we will talk about where interest rates will fall.
Should the new government react to this?
The government must help the CNB, which is now pushing for a shorter end as it tackles a very loose fiscal policy. The fact that household consumption has reached an ancestral level shows that the government has exaggerated this with the support of household consumption. The abolition of the super-gross wage helped rather high-income groups, while low-income households needed help. The situation has changed, now it is necessary to get funds in the budget. Budgetary policy has been drowning unnecessarily under inflation. Covid’s aid is still paid instead of quitting. It’s inefficient. Support against global chains will not help, the government has contributed to inflation. Now is the time to help fight inflation. On the contrary, it should find savings in the budget so as to save on consumer spending but encourage investment. The government must find savings so that socially weak families are not endangered. Savings must be made in the light of social peace and the plight of households, which are affected by high energy reserves and have low incomes. So focus the help on those who need it and let the households that manage it financially adapt.
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