Policy rate may breach 2% level in 2019 – CNB governor Rusnok

The CNB’s policy rate may breach the 2% level in 2019, CNB governor Jiri Rusnok told Ekonom, an economic magazine. He didn’t wish to commit to any projection how much the policy rate could increase, as he pointed to a very dynamic situation at the moment, with a lot of external risk. However, he remains certain that the CNB will continue with monetary tightening this year, though the pace could vary. Rusnok said that the CNB will most probably downgrade its GDP growth forecast for 2019, currently at 3.3%. Yet, he didn’t sound as if the CNB is downgrading its projections considerably, so we doubt that the GDP growth forecast will fall much under 3%, if at all. The consensus currently suggests GDP growth at 2.8-2.9%, but there are already some forecasts that economy growth could slow down to as much as 2.2-2.4% in 2019.

Rusnok doesn’t believe that it will come down to this, however, as he doesn’t expect that there will be a major impact from events like Brexit or trade relations with the United States. He said outright that the most likely outcome from Brexit was not a major economic downturn, while he didn’t wish to comment a lot on trade barriers coming from the United States. A major part of Rusnok’s calm is his expectation that the ECB’s monetary policy will provide some manoeuvring space to the CNB as well. At least Rusnok appears to be operating on the assumption that the ECB will start raising rates in the summer, something we don’t believe is a given, judging from signals coming from major euro area economies. Nevertheless, Rusnok seems to believe that the CNB will be able to maintain the same interest rate differential by raising rates along with the CNB. On the exchange rate, Rusnok no longer gave such a big emphasis, saying that it continued to deviate from the CNB’s forecast but that it wouldn’t be determinative for monetary policy. He said that the most important goal was that the exchange rate should be stable, which it has remained.

On domestic developments, Rusnok commented with regret that the government hasn’t done more to deal with growing shortages of residential property, despite assurances that it wants to take measures. He also expressed his disappointment that the CNB doesn’t have more authority to intervene in the mortgage market, given that growing indebtedness of households may create issues for banks at some point. Yet, Rusnok remained somewhat bullish on mortgage market developments, as he doesn’t expect a considerable deterioration in asset quality once the fixed interest rate lending schemes end, as many of these were contracted when interest rates were at a record low. He said that the CNB has been doing what it can, pointing to the tighter recommendations for mortgage lending, which limit the DSTI ratio at 45% and the DTI ratio at 9.

Overall, we see Rusnok as still relatively hawkish on monetary policy, but without a major rush to raise rates as quickly as possible. For instance, Rusnok refused to comment a statement of former CNB vice governor Mojmir Hampl (his term ended on Dec 1, 2018), who said that the policy rate should reach 3% this year, which implies the same amount of tightening as in 2018. Yet, we believe Rusnok is prone to change his mind quickly if events don’t unfold as he expects. He has several major assumptions, which we believe are far less certain that he might wish, like the impact from Brexit and US-imposed trade barriers, or the ECB’s monetary policy course. We should note that even if the US government doesn’t slap a lot of import tariffs on European exports, like cars, US trade policy towards China could do enough harm to Europe on its own. This could make the ECB delay its monetary tightening plans, so we would argue that rates in the euro area are not going to rise soon. In such scenario, Rusnok’s arguments will suggest that the CNB should hold as well, which we believe has a decent probability of happening. We still consider the overall stance of the CNB board as hawkish, but we believe it is less hawkish than it was in 2018.

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