Czechs Must Hike Rates to Rein In Prices, Policy Maker Says

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The Czech Republic may lose some of its ability to steer inflation if it doesn’t raise interest rates in response to a surge in consumer prices, according to one the country’s biggest proponents of higher borrowing costs.

While the U.S. Federal Reserve and the European Central Bank are renewing monetary stimulus, the eastern European country is leaning the other way to cool its fastest inflation in seven years.

After eight hikes in borrowing costs since 2017, the Czech National Bank has held fire for five meetings to asses risks to the export-oriented economy. The pause has come even after internal forecasts implied that there’d be two increases by the end of the first quarter.

Vojtech Benda, who unsuccessfully sought higher rates at the last three meetings, says a more pro-active approach is needed. Risks from Brexit and global trade have receded, while record-low unemployment will stoke Czech wages and consumer prices, he said Monday in an interview.

“For inflation to return to the 2% target, our monetary policy must be tighter,” Benda said, adding that he hadn’t decided how to vote at the next meeting, on Feb. 6. “Our job is to smooth out inflation, not interest rates. I don’t think we can return to the inflation target by doing nothing at all.”

Several board members have indicated they expect a balanced debate next month on whether or not to resume rate increases. While the koruna’s 0.8% appreciation against the euro since the bank’s December meeting could be an argument to hold rates, a spike in inflation to 3.2% last month -- above the 1%-3% tolerance range -- could bolster calls for a hike.

Still, money-market investors are skeptical that Benda will be able to rally enough board members to support tightening. Forward-rate agreements, contracts used to bet on future changes in borrowing costs, are pricing in a prolonged period of stable rates, followed by a cut in late 2020 or early 2021.

Read more: Czechs Flag Another Close Call on Rates After Inflation Surge

For Benda, there’s a risk that central-bank inaction could eventually boost inflation expectations. The future direction of monetary policy will also depend on the results of upcoming wage negotiations as a prolonged period of faster inflation could embolden workers’ demands.

Benda’s comments contrast with the view of fellow rate setter Ales Michl, who said last week that the bank should refrain from hikes to avoid stifling manufacturing, the lifeblood of the economy. Underscoring the dilemma, Governor Jiri Rusnok said this month that rates will probably stay unchanged in 2020, but signaled a small increase is possible.

Benda rejects the preference of some board members for stable interest rates to avoid a cut in the second half of the year, which was indicated in the bank’s most recent forecast. The 44-year-old economist said he doesn’t mind reversing increases later if necessary.

“A possible rate hike in February obviously won’t fix the elevated inflation levels now and in the next few months,” he said. “But it should support a faster return of inflation toward the target on the monetary-policy horizon.”

(Updates with market prices in seventh paragraph.)

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: Blaise Robinson at brobinson58@bloomberg.net, Peter Laca, Michael Winfrey

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