Next Czech central bank chief proposes to end rate hikes

The Czech National Bank is seen in the center of Prague, Czech Republic, August 3, 2017. REUTERS/David W Cerny

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  • President looks to Michl to end rate hikes
  • Michl has opposed policy tightening over the past year
  • Was previously considered a generic job opportunity
  • Corona drops more than 1% to lowest level in two months

PRAGUE, May 11 (Reuters) – The next governor of the Czech National Bank (CNB), Ales Michl, has called for an end to rapid interest rate hikes to tackle the strongest inflationary pressures in nearly three decades after his appointment on Wednesday as head of the bank.

In a ceremony at Prague Castle, President Milos Zeman appointed Michl, a member of the bank’s board of directors who opposed the policy tightening that pushed up the bank’s key rate (CZCBIR = ECI) by 550 basis points since last June to a 23-year high of 5.75. %.

Michl, 44, will replace outgoing governor Jiri Rusnok for six years from July, and his arrival could influence the bank’s views on using rates against inflation – especially if Zeman appoints like-minded people three more seats on the seven-member Board of Directors. coming weeks.

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The krone, after losing 2% last week on leaks that Michl would get the job, slipped more than 1% to hit a two-month low of 25.47 per euro after being given the official green light.

Czech inflation is currently above 14%, its highest level since 1993, and is starting to hit households facing soaring utility bills. Analysts expect a sharp slowdown in growth this year.

Michl said after his appointment that his main goal would be to bring inflation back to the bank’s 2% target, a process he expected to take two years.

But higher rates were no cure given that inflation was mainly driven by energy prices, he said, and the level of rates when he takes office should be sufficient.

“I hope that I will propose, at the first meeting that I will facilitate this summer, the stability of interest rates for a while,” he said.

“We will assess the impacts of monetary policy to date, new indicators coming from the economy, and after a certain period we will decide what to do next.”

Markets have been pricing in one last big rate hike in June, although that still lags the bank’s latest outlook showing interest rates rising this quarter before falling thereafter.

“If the (new) banking council really explicitly rules out further rate growth, that can be seen on the krone, given the current high inflation expectations,” said Jan Bures, chief economist at Patria Finance.

“The CNB may, like the NBP (Polish central bank) or NBH (Hungarian central bank) in the past, become a less credible partner for the markets and may be pressured into further action by a weaker exchange rate.”

Economists said Michl could also come into conflict with the central bank’s team of experts who have factored rate hikes into their forecast.

“If (Michl’s) findings diverge so significantly from central bank analyses, I don’t know how Michl himself sees his job at the helm,” said economist Jaromir Baxa of the University’s Faculty of Social Sciences. Charles University.

VARIOUS PLANS

Zeman did not say whether he will replace Vice Governor Tomas Nidetzky and board member Vojtech Benda – both Trek supporters whose terms are expiring alongside Rusnok but are eligible for a new term. The president is also to occupy the seat that Michl will vacate when he takes office as governor.

Michl has not always been dovish, voting in the minority for rate hikes after joining the board in 2018.

Before that, Michl worked as an economist at Raiffeisenbank and set up an investment fund. He advised former Prime Minister of Finance, billionaire Andrej Babis, now opposition leader and possible presidential candidate.

Michl said inflation would fall if cost-side shocks cease, budget deficits are reduced and companies exercise wage moderation.

He spoke out against the sale of any of the bank’s large foreign currency reserves, including its recently expanded program of selling the returns from those reserve assets.

Instead, he advocated investing the bank’s reserves in higher-yielding assets to earn profits and backing a sovereign wealth fund he proposes to set up.

During the COVID pandemic, the bank rejected its proposal to send part of its profits – made mainly from unrealized foreign exchange gains – to the state budget, since the bank is obliged to first cover past losses and create reserve funds.

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Reporting by Jan Lopatka, Jason Hovet and Robert Muller, writing by Jan Lopatka, editing by Catherine Evans, Tomasz Janowski and Hugh Lawson

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