Czech Central Bank Faces 50-50 Split on Rate Hike at June 18 Meeting
Debate Intensifies Over Czech Central Bank's Next Move
(Corrects date of next meeting in paragraph 5 to June 18 not June 16)
By Jan Lopatka and Jason Hovet
Inflation and Rate Hike Prospects
PRAGUE, June 10 (Reuters) - The prospect of a bump in Czech inflation alongside a subdued economy will create a balanced debate between stable interest rate policy and a 25-basis point hike at the central bank's meeting next week, board member Jan Prochazka told Reuters.
Prochazka said a hike could act to signal the bank's intention of keeping a lid on inflation, which should peak above 3% in January next year, and it could serve to reflect a spike in wage growth and faster credit expansion.
If the bank is to hike following a year of stability, it should be done now rather than later, he said in an interview.
"I cannot say (now) whether I want a hike or stability. It really is 50-50," he said. "If we are to do something, it is of course always better to do it much sooner."
The Czech National Bank meets on June 18. Markets price in a 25 basis-point hike to the main repo rate, currently at 3.50%.
Prochazka, who had advocated for the main rate to go to 3.25% in the cycle, said there were arguments for sitting out inflation risks, or alternatively for acting preemptively.
Potential for Reversal of Any Hike
ANY HIKE COULD BE REVERSED
He said a decision for slight tightening may be swung by the outlook for inflation early next year and would not hail the start of a new cycle.
"This is simply so balanced that... this vote could be decided by our inflation expectations for January, February," Prochazka said.
He said he did not want inflation spiking above the main rate early next year, with the bank communicating that rates should remain above inflation.
"If something is going to be done, then I can really imagine one (rate increase), which will be relatively quickly reversed, but you do it because you do not know what will follow," he said, referencing uncertainty over the war in Iran and the closure of the Strait of Hormuz, a key oil corridor.
Market bets of up to 100 basis points in hikes within a year look unrealistic, he said.
Economic Factors Influencing Decision
Subdued Growth and Restrictive Policy
ECONOMY A FACTOR
Policy, as well as the exchange rate, were restrictive vis-à-vis economic growth which has been subdued, and inflation expectations were anchored, he said, adding that markets' optimistic view of the global economy could lead to a repricing.
Prochazka said the economy was also a factor as "it simply does not need such high rates."
Inflationary Risks and Fiscal Policy
"Wages, consumption and residential real estate prices are still inflationary risks .. But if these risks do not materialize strongly and inflation expectations return to pre-Hormuz levels, then we are on the safe side and a rate hike would not be strictly necessary."
At home, fiscal policy - showing a higher deficit next year before a decline - was an inflationary risk but was predictable, - although measures to cut fuel prices and energy bills blurred the picture.
(Reporting by Jan Lopatka and Jason Hovet; Editing by David Holmes)
