Czech central bank expects no more than a 50bp rate hike in 2019

CNB governor JIri Rusnok expects no more than a 50bp cumulative rate hike in 2019, he told Nova, a TV channel. He said that the CNB would tighten monetary policy at a much slower pace than in 2018, given that the economy has already shown some slowdown signs. Rusnok argued that despite the observed slowdown, the economy continued to grow at a very robust pace in conditions of virtually zero unemployment, which exerted inflationary pressure. Rusnok suggested that a neutral level of the policy rate would be somewhere at 2% or slightly above, which is why he doesn’t expect more rate hikes this year. He also noted that there were plenty of external risks, referring to Brexit and possible impediments to global trade. Yet, Rusnok added that he considered the finance ministry’s latest projections, namely GDP growth at 2.5% in 2019 and 2.4% in 2020, as too pessimistic. We remind that based on these forecasts, the finance ministry is currently looking for savings at CZK25bn in the 2020 budget, which have been the topic of sometimes heated discussions in the cabinet thus far.

Rusnok underlined that despite economic developments, the CNB’s priority was price stability, which is where monetary policy was aimed at. It appears that it was him who put forward that argument at the latest MPC meeting, when there was a debate whether the CNB should let the exchange rate deviate so much from the CNB forecast. While Rusnok didn’t say how he would vote at the next MPC meeting on Mar 28, we believe his argument on price stability implies that he would be willing to vote for a rate hike this time, given how inflation has been above the CNB forecast in both January and February (though the gap has declined) and the odds are it will remain above the forecast in March.

Inevitably, the conversation also approached mortgage loans and the CNB’s policy towards them. Rusnok said that the primary factor behind property price growth was supply, as slow issuance of building permits and the generally slow process of residential construction led to insufficient number of properties, given growing demand. Rusnok added that the issue was mostly in larger cities, where construction opportunities are much fewer, while the number of their inhabitants is growing due to more work opportunities. As far as mortgage loan availability is concerned, Rusnok assured that lending rates won’t rise as quickly as they did in 2018.

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