PRAGUE: A weaker-than-expected crown exchange rate is one reason to discuss another interest rate increase at the Czech central bank’s final policy meeting of the year on Dec. 20, central bank board member Vojtech Benda said on Tuesday.
The crown has failed to resume appreciating even after four consecutive rate increases, which brought the main repo rate to 1.75 percent last month.
“The fact that inflation is a whisker lower and third-quarter gross domestic product also came in a little below, is the past. It is not key for me in voting,” Benda told Reuters in an interview.
“I will evaluate how to vote on the basis of a full analysis that we will get this Friday. The development of the exchange rate pushes it slightly toward higher rates already in December, although it is not 100 percent clear.”
The exchange rate is a key inflation factor because it affects import prices in the highly open economy.
The bank’s baseline forecast sees almost no room to increase interest rates next year. Its “sensitivity scenario” assumes a weaker crown, which would push market rates, a proxy for official rates, 80 to 90 basis points higher in mid-2019.
“If the exchange rate remains weaker, and the crown does not start to strengthen, that would speak quite clearly in favour of tighter monetary policy through interest rates and a more pronounced rate growth next year,” Benda said.
The bank should gradually increase rates to what it sees as equilibrium level of 2.5 to 3 percent, if conditions and inflation development require it, he said.
Benda’s view partly diverged from Governor Jiri Rusnok’s, who said in a Bloomberg interview on Tuesday the debate was tilting against a rate increase this month. Rusnok also said a lack of crown gains next year would lead to more tightening.
The bank’s November forecast saw the crown at an average 25.7 to the euro in the final quarter. It has averaged near 25.85 in the past two months. The bank sees gains toward 24.4 by late next year.
Benda said the Czech economy was on solid footing and he saw it growing by around 3 percent next year. Wages should continue to grow in a tight labour market, he said, and that would put pressure on inflation, which the bank foresees above its 2 percent target throughout 2019.
He said the crown may be partly weighed down by banks discouraging clients from holding crown deposits, because banks have to pay a fee into a bank resolution fund based on their deposit holdings at the turn of the year.
But he said he did not expect the impact of this market activity to hurt the crown as much as global sentiment.
Benda rejected suggestions the bank may sell any of its foreign reserves to bolster the crown. But he said at some point in the future it might return to selling yield it earns on foreign assets.