October 1, 2020

Czech Central Banker Finds Comfort in Inflation as Virus Soars

The headquarters of the Czech central bank in Prague, Czech Republic.

Photographer: Martin Divisek/Bloomberg

As central banks around the world expand their help to economies hit by the coronavirus pandemic, Czech policy makers can sit tight and let inflation do its work.

After cutting interest rates the most in the European Union this year, the Czech central bank is probably done with easing, Deputy Governor Tomas Nidetzky said in an interview on Monday. It should keep the benchmark at 0.25% for at least a year before considering raising it, he said, as resilient price growth will support a recovery from a virus-triggered recession.

While a resurgence in coronavirus cases is darkening the outlook for the export-reliant economy, the government is keeping unemployment low and propping up household spending, for now. That’s one of the reasons for inflation running above the tolerance range set by the central bank, which has signaled the next move will likely be a hike.

Stubborn Prices

Czech inflation runs above central bank’s 1%-3% tolerance band

Source: Czech National Bank, Eurostat

“The current inflationary episode is temporary and will benefit the economy by encouraging consumption, investment and gross domestic product growth when it’s most needed,” Nidetzky said. “It also puts us in a comfortable position in that, unlike the euro zone, we’re not seeing any deflationary pressures and don’t need to implement any unconventional monetary-policy tools.”

The 50-year-old economist and former financial-industry executive praised the combined response of fiscal and monetary policy. Like many countries across Europe, Prime Minister Andrej Babis’s government has subsidized salaries and commercial rents, paid extra bonuses to health-care workers and provided guarantees for cheap business loans.

“The roll-out was fast, bold and coordinated,” said Nidetzky. “The government is now facing a big challenge as its initial quick blanket stabilization measures need to be followed by more targeted stimulus.”

Despite record daily increases in new infections this month, Babis has pledged to avoid a second full lockdown. Still, the rising uncertainty has prompted money-market investors to scale back bets on the central bank starting to raise rates in the second half of next year.

The quickening spread of Covid-19 is making the central bank’s forecast, which also assumes policy tightening after mid-2021, seem “rather optimistic,” according to Nidetzky. He expects inflation to slow after the current rescue programs are phased out.

“Many of the furloughed workers are de facto already unemployed — their jobs will disappear when the wage subsidies and other government measures expire,” Nidetzky said. “I believe one way the central bank can at least mitigate the high degree of uncertainty is keeping its interest rates stable.”

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