Czech Central-Bank Chief Urges Less Spending to Avoid Rate Hikes

Peter Laca, Bloomberg News

(Bloomberg) --

Czech central-bank Governor Ales Michl is intensifying his appeal on people and the government to help tame inflation by spending less so that policymakers can refrain from raising interest rates further.

Inflation will slow considerably from spring and move toward the 2% target next year, with the central bank’s baseline scenario foreseeing stable borrowing costs and a strong currency, Michl said in a debate on CNN Prima News channel on Sunday. He reiterated his recent warnings that the bank may tighten monetary policy further if it sees a major jump in domestic price pressures.

The Czech National Bank has held rates steady since Michl took office in July after he opposed rapid hikes enacted by the previous leadership. He has said rates will stay higher during his six-year term than in the past decade to encourage savings and has been calling for moderate wage demands.

“The most important thing for us now is that households really start saving, stop spending,” Michl said. “It’s so far happening, household spending is smaller and smaller. That’s the first good news, because it’s an anti-inflationary phenomenon.”

He pointed to a cooling property market and slowing loan growth as additional signs that inflation will ease, even as price growth may accelerate temporarily in the first two months of this year.

While a strong koruna is helping to damp inflation by making commodity imports cheaper, the central bank would have to tighten policy if large salary increases caused a jump in household consumption, according to the governor.

Read more: Czechs Hold Rates But Warn Another Hike Possible If Demand Rises

He also urged the government to be cautious about boosting spending on subsidies and welfare aid because that would run counter to restrictive monetary policy.

“It’s in the interest of the Czech Republic to appeal on the politicians to keep the deficit as low as possible,” Michl said.

Another board member, Tomas Holub, agreed that inflation will slow sharply, although he saw a risk that price growth may stabilize next year at “unpleasantly high levels” of more than double the target. That’s why monetary policy should be “slightly tighter,” Holub, a member of the central bank’s hawkish minority, said in a debate on public TV on Sunday.