Jan Lopatka

PRAGUE (Reuters – Czech central banks are likely to raise interest rates on March 31st and will discuss increased use of foreign currencies interventions. Board member Tomas Holub added that he is not in favor of buying crowns to bring down inflation.

Czech policymakers increased the main repo to 4.5% from the previous 0.25%. They tightened aggressively to reduce inflation which rose to 11.1% in 24 years.

Holub stated that he wouldn’t exclude rates exceeding 5% from the market, even if it was March.

Holub indicated that he anticipated a larger mix of views in March than previous meetings. With the expected rise in inflation due to the war, which is expected to cause an increase of between 13-14% and slowed economic growth in the summer, Holub also stated that the effect of the war would further drive up inflation.

He said that the central bank would be able to “look through” a potential stagflationary surprise if inflation is below its 2% target. Other price shocks are impossible to ignore, given the current high inflation and low unemployment rate of 3.5%.

He stated that “for me, the inflation problem now constitutes a priority monetary policy issue so I will certainly vote for continued growth in interest rates.” “But, it is difficult to predict how big (the March decision), given the anticipated wider range of opinions.”

The central bank was considering raising its main rate to around 5.5%, he said. This is even prior to Russia’s invasion of Ukraine (which Moscow describes as a special military operation).

It would be absurd for them to lower their standards than this. Holub asked whether or not to increase the level. Holub added that there is another line of thought. That is, how to make foreign exchange interventions more effective in reducing inflation.

He stated that he anticipated being in camp and favoring larger than small moves, but also indicated that he was open for discussion about increasing the rate to 5% right now or further in May.

To smoothen out volatility following the war in central European currencies, the central bank began buying crowns around March 4. It used its vast foreign currency reserves of 157.46 trillion euros to purchase crowns. This is approximately two-thirds of Gross Domestic Product.

The Governor Jiri Rusnok indicated that on Sunday there would be a debate about possible extending the interventions beyond just decreasing volatility, to also bring down inflation by a strengthening currency.

Holub stated that he would prefer to see further tightening in monetary conditions via interest rates with the expectation of market forces adjusting the exchange rate, rather than direct utilisation.

He said that it would be hard to give a mandate for these interventions. The foreign reserves, which are finite in comparison to the global market’s size, remain small.

Holub indicated that he would be open to discussing the possibility of more rate rises, even if Holub felt the overall board was too cautious.