Czech central banker: no rate cuts until inflation clearly lower -magazine

PRAGUE (Reuters) – The Czech National Bank (CNB) should not cut interest rates until inflation is clearly lower as rates need to stay higher for longer to slow price growth, central bank board member Jan Prochazka was quoted as saying.

CNB warned on March 29 that the market was prematurely pricing in rate cuts, pointing out strong January industrial wage data. Governor Ales Michl said then that a rate hike could still be on the cards in May if the risk increased of a wage-price spiral.

The central bank has held its main interest rate at 7.00% since June 2022 after it had raised it by 675 basis points over a year-long tightening cycle.

“Until we see strong enough signs that inflation is falling, rates will not go down either,” Prochazka said in an interview published by the Ekonom weekly magazine on Thursday.

“We need to keep rates at higher levels for a long time and not ease too soon. Then we can cool the economy,” he said.

Rate-setters across central Europe have doubled down on their hawkish policy messages in the past two weeks.

Although Czech inflation eased to 16.7% in February, it is still far above the central bank’s 2% target. The bank sees the annual pace slowing to single-digit levels in the second half of the year, and easing to its target in 2024. March inflation data is due later on Thursday.

The central bank has also been closely watching wages as some central bankers have identified rapid wage growth as a potential trigger for further policy tightening.

Prochazka also supported that view. He said he considers labour market overheating, and fiscal policy as two domestic risks for the inflation outlook. Internationally, major central banks could pose a threat via policy tightening, putting pressure on the crown.

“If it turns out that the labour market is overheated, and ECB policy and the Fed’s policy will be activist … the rates would have to go up, perhaps already at the next meeting (on May 3),” Prochazka said, reiterating his view at the bank’s March 29 meeting.

(Reporting by Robert Muller. Editing by Jane Merriman)