April 24, 2018 / 3:40 PM / a year ago

Czech central bank's Benda says risks rather on inflationary side

PRAGUE (Reuters) - Inflationary risks in the rapidly growing Czech economy are somewhat tilted to the upside but there is no need to raise interest rates immediately, the central bank’s Vojtech Benda said on Tuesday.

The Czech National Bank’s (CNB) board meets to review its policy and rates on May 3, when it will assess a quarterly update to its macroeconomic outlook to see if another rate hike is needed to cool the rapidly growing economy.

Benda has been one of the more hawkish board members since last autumn, and he stuck to his guns at the board’s last meeting despite its assessment that the risks to the economy were “slightly anti-inflationary”.

The market expects further policy tightening in the second half of this year now that the central bank has raised its main two-week repo rate CZCBIR=ECI in three steps to 0.75 percent since last August.

The CNB’s staff forecasts, on the other hand, see another rate hike only around the turn of the year. Benda said that despite the upside risks, there was no need to hurry with rate hikes.

“I don’t really see a reason (to hike on May 3), because there has been rather swift tightening in previous months, which matches what I would see for the nearest months, the risks could appear in the future,” Benda told Reuters in an interview.

“The risks are rather on the inflationary side, but I will watch the data if they materialise or not,” he said.

The Czech economy expanded 5.5 percent in 2017, one of the fastest growth rates in the European Union, while its unemployment rate of 3.5 percent in March was the lowest in the bloc. There were more job vacancies than people available to fill them.

That has also spurred wage growth - by 5.3 percent year-on-year in real terms in the last quarter of 2017.

“If the wage dynamics do not moderate gradually, then it could create higher inflationary pressures and a need of a tighter monetary policy,” Benda said.


The central bank needs to consider the crown and monetary conditions in the euro zone, Benda said.

The crown EURCZK= has appreciated at a slightly slower rate against the euro than the CNB had expected, a fact highlighted by Benda as well as fellow board member Marek Mora.

The CNB forecast the average crown rate at 25.400 per euro in the first quarter, appreciating further to 24.900 in the second quarter.

The crown was trading at around 25.450 on Tuesday and its 90-day moving average for the first quarter was 25.459, Reuters data showed. In the CNB model, a 1 percent appreciation of the crown roughly compensates a 25 basis-point rate hike.

“The (crown) exchange rate is slightly weaker compared with the forecast, but so far it does not mean any reason to significantly revalue the view of the deflationary influence of the exchange rate in the coming period,” Benda said.

Inflation has been below the central bank’s forecast and its 2 percent target in recent months, slowing to 1.7 percent in March, a 16-month low.

However, Benda said that he wouldn’t worry as the bank’s policy was forward-looking.

He noted that euro zone developments were quite positive for the Czechs, while the central bank had to check the interest rate differential.

The ECB will be watched in June and July as its bond purchases are scheduled to expire by the end of September.

“Should the ECB’s monetary policy remain significantly loose, that would be one of the factors for us why we can’t boldly tighten our policy via interest rates,” Benda said.

Reporting by Robert Muller; Editing by Hugh Lawson

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