The Czech National Bank is in no rush to tighten policy but may start raising interest rates in the second half of the year, when more information about the domestic economy and the COVID-19 pandemic will be available, Vice-Governor Tomas Nidetzky said on Monday.
The Czech central bank may become the first in the EU to tighten monetary policy as the domestic economy has shown resilience, mainly driven by the export-focused manufacturing industry and parts of the services sector not closed by the government’s anti-epidemic restrictions.
The central bank slashed the main two-week repo rate by 200 basis points to 0.25% last spring to prop up an economy hit by the initial wave of the coronavirus outbreak.
At the last monetary policy meeting on Feb. 4, the central bank forecast three hikes by the year’s end but the bank’s board said longer-than-expected lockdowns amid the coronavirus pandemic could reduce the need to hike rates.
Nidetzky said that fundamentally nothing has changed in the past month.
“I see rate stability in the first half, I don’t see any urgency to act. That has to do with timing, with the risk of premature tightening of monetary conditions, which is bigger for me than some risk of a delay,” he said.
“If economic results are in line with forecast, then we would be ready and tuned for rates adjustment (after the middle of the year),” he said.
The domestic economy has been doing surprisingly well, and given the nature of the shock there was a fair chance that it would revive fast once that burden was removed, Nidetzky said.
Annual inflation eased to 2.1% in February, its slowest pace since December 2018, while the gross domestic product grew by 0.6% quarter-on-quarter in the last quarter of 2020. Still, for the whole of last year, the Czech economy fell by a record 5.6%.
Together with the signs of economic revival, the crown has been mostly strengthening this year, beating the central bank’s forecast, and raising the question of whether the currency rather than interest rates could deliver the desired monetary tightening.
Nidetzky was sceptical about such a prospect.
“I don’t really think that the crown would do the job for us, that it would strengthen so much that we would not have to make some steps,” he said.