Czech central bank choices offer no carte-blanche for dovish governor

By Jan Lopatka and Robert Muller

PRAGUE (Reuters) -The Czech president has filled three seats on the central bank’s board with economists who are likely to ease market worries about a sharp dovish swing after the current board raised interest rates to tame the highest inflation in nearly three decades.

The appointments to the Czech National Bank (CNB) announced on Wednesday include two former central bankers, a choice adding predictability, and follow a surprising choice last month of board member Ales Michl as new governor from July.

Michl has opposed the bank’s 550 basis-point interest rate rise over the past year amid one of Europe’s biggest inflation spikes, saying price growth was mainly imported.

The new names do not indicate a dovish wing is automatically getting an upper hand on the seven-member board.

Incoming Vice-Governor Eva Zamrazilova praised the bank’s interest rate hikes as timely and necessary at a ceremony on Wednesday to announce the appointments, but said any further steps required deep analysis.

“Interest rate increases never have been, are or will be popular, but despite that I assume they were necessary and will soon start to show in slowing of inflation and at least in slowing the growth of the volume of money in the economy,” she said.

The crown extended gains after the appointments and traded 0.7% up on the day at 24.602 to the euro, a two-week high.

The currency had dropped 3.7% drop after Michl’s appointment last month, which forced the bank to intervene in the market.

Zamrazilova is a right-wing economist and chief of the country’s fiscal prudence council who held more hawkish opinions than her colleagues during her 2008-2014 term on the central bank’s board.

Another new board member is Karina Kubelkova, an economist with from the country’s Chamber of Commerce who said in a March note that there was a domestic element of inflation, and she expected “effective monetary policy of the CNB” to prevent the risks of even higher inflation.

Their appointments by President Milos Zeman mark the first time the board will have two female members.

Jan Frait, head of the central bank’s financial stability department who served on the board in 2000-2006, will round out the board.

Frait was dovish, but that included a period when the crown was appreciating and the central bank was undershooting its inflation target, said economist Jaromir Sindel of Citi Research.

“We think this Bank Board composition could avoid the CNB being far ‘behind the curve’ if demand-side inflationary pressures strengthen. This could ease the crown’s risk premium,” he said in a note prior to the appointments.

UniCredit chief economist Pavel Sobisek said markets may be calmed by the appointments. “It is positive that uncertainty ends and also that this body will move toward gender diversity,” he said.

Zeman did not give second six-year terms to Vice-Governor Tomas Nidetzky and board member Vojtech Benda, who backed the bank’s interest rate tightening to 5.75%, together with outgoing Governor Jiri Rusnok.

The new members will take office after the bank’s June 22 policy meeting, where the board is expected to raise interest rates further.

Michl has signalled he would propose rate stability after he takes over.

Czech inflation jumped to 14.2% year-on-year in April, and is expected to reach 15% around the middle of this year before beginning to cool off.

(Additional reporting by Jason Hovet, Writing by Jan Lopatka, Editing by William Maclean and Jane Merriman)