The Czech central bank warned it may have to raise borrowing costs if home-grown inflation risks escalate, calling investors’ bets on monetary easing “premature.” The koruna gained.
(Bloomberg) — The Czech central bank warned it may have to raise borrowing costs if home-grown inflation risks escalate, calling investors’ bets on monetary easing “premature.” The koruna gained.
Policy makers kept the benchmark rate at 7% on Wednesday, but the vote was tighter than before, with three out of seven board members seeking a quarter-point increase. Governor Ales Michl said the current policy setting is already taming domestic demand, pointing to slowing credit growth and a cooling property market.
But he also said that ballooning government spending and a tight labor market may drive prices higher, and the bank will again be deciding in June whether to keep borrowing costs unchanged or raise them.
“Fiscal policy is the most inflationary factor right now,” Michl told reporters in Prague. “Unless a long-term, credible consolidation package is announced, this will simply create inflationary pressures going forward and we will probably have to raise interest rates and fight against the stimulus provided by the government.”
The Czech economy emerged from a mild recession in the first quarter, with manufacturers seeing stronger demand for cars, auto parts and other key export items, and unemployment running at the lowest level in the European Union.
The January-April budget deficit reached about two thirds of the full-year target of 295 billion koruna ($13.9 billion), and the government is working on a plan to reduce the gap by at least 70 billion koruna next year.
The central bank improved its forecast for economic growth for for this year and next, and reiterated an outlook for reaching the 2% inflation goal by about mid-2024. The board also reaffirmed its pledge to prevent excessive koruna moves.
The baseline projection implies stable rates followed by a gradual decline, the bank said. The board also discussed two alternative scenarios — one assumes a longer period of stable rates and another considers “elevated inflation expectations.”
Michl said the board discussed proposals for even bigger rate hikes than the 25 basis-point hike backed by the three members.
While Michl’s comments prompted investors to scale back bets on future policy easing, money markets are still pricing in about 75 basis points of rate cuts by yearend, starting in September.
The koruna gained 0.5% to 23.49 per euro after the news conference, with yields on shorter-term government bonds jumping as much as 20 basis points.
“The central bank has delivered the most hawkish message possible, short of an actual hike,” said Frantisek Taborsky, a strategist at ING Groep NV in London. “It’s a good strategy to support the koruna and push back against market bets on rate cuts while avoiding further policy tightening.”
–With assistance from Deana Kjuka.
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