Vice governor of the Czech central bank sees Brexit as possible recession risk

Brexit poses higher recession risks, Czech central bank, CNB vice governor Marek Mora said in an interview. He warned that a hard-Brexit scenario could have considerable adverse effects to European economies, including the Czech Republic, even if a direct impact would be limited at first. He suggested caution was in order, given that there were already some recession signs seen in Europe and the economic cycle was most probably past its zenith. Mora didn’t go as far as to expect a major slowdown of the Czech economy, but he implied that signs will continue to indicate moderation. He quickly added that it wasn’t necessarily a new crisis on the horizon, but a certain cooldown of activity may be in order. As far as domestic developments are concerned, Mora suggested that property prices should eventually cool off, through monetary policy and additional measures, like the CNB’s tighter recommendations on mortgages, effective as of October. These doesn’t seem to have eased as of October, judging from available data, but a slower economic growth might eventually lead to that. Mora also emphasized that the CNB didn’t have a social function, denying accusations that it is making mortgages increasingly inaccessible.

As far as monetary policy is concerned, Mora said he didn’t consider the monetary tightening carried out in 2018 so far as excessive. He said that the tightening was warranted and mentioned once again the deviation of the exchange rate from the CNB forecast. When inquired further, however, Mora was quick to add that the CNB didn’t target an exchange rate level and that it simply accounted for the pass-through of the exchange rate on import prices, which supplied major inflationary pressure at the time. He was cautious to say how the new make-up of the CNB board was going to act at its next MPC meeting on Dec 20, and he said he expected there would be arguments for holding the policy rate or going for another rate hike.

We currently consider Mora in a wait-and-see mode. He has always been somewhat hawkish on monetary policy, though his voting record shows only one deviation towards higher rates. At this point, we believe his concerns about a faster economic slowdown caused by a hard-Brexit scenario will take precedence, so it wouldn’t be too much of an issue if the policy rate is held in December. If data on food and fuel prices prove accurate (we have our doubts on food prices), then inflation will ease faster than anticipated at the end of the year, which we believe will be a good enough excuse to hold rates now and be open to further tightening in 2019. The consensus currently expects exactly that, a hold decision now and two more 25bp hikes in 2019, so it is possible that Mora may oblige.

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