Czech central banker flags potential stronger rate tightening -paper

PRAGUE (Reuters) -The Czech National Bank might be forced to raise interest rates by more than its current course suggests if a dovish majority is created on its board, board member Tomas Holub said.

There are three appointments to be made on the seven-seat board by the end of June, which might sway the majority towards the dovish stance of current board member Ales Michl, who is due to take the helm in July.

“An appointment of doves and their majority at the board could, paradoxically, force a stronger increase in rates than would correspond with our course so far,” Holub said in an interview published by the Lidove Noviny newspaper on Monday.

The Czech central bank has raised its main two-week repo rate by 550 basis points to 5.75% over the past year as it looks to tame soaring inflation driven by high energy prices and robust domestic demand.

“The markets’ view of the change could be that the doves will not fight for price stability and raise interest rates, and that the crown becomes a less transparent, less safe currency. So it could start weakening,” Holub said.

The central bank is counting on a strong crown to help to reduce some imported inflation, so any weakening could prompt more pronounced interest rate increases to bolster the currency.

President Milos Zeman has sole power to appoint central bank board members and last month picked current member Michl, who has opposed policy tightening, to lead the central bank from July. Michl has said he would propose rate stability once he becomes governor.

(Reporting by Robert MullerEditing by David Goodman)