Governor Aleš Michl recently promised students at the University of Economics that inflation will be in the single digits within three months, would you join him?
Yes, I believe it. It might even be before the holidays. We can already go below ten in June, but we will definitely drop there during the holidays.
Will the journey from ten percent inflation to the two percent target be similarly quick?
Disinflation will continue with occasional fluctuations. Let’s recall, for example, last October, when a cost-saving tariff was introduced, which the statistical office projected as a reduction in the price level. So this October we will see a relatively high number relative to the benchmark, otherwise the steady decline in inflation will continue and we will be on target in January or February. At the beginning of the year, the opposite downward trend occurs.
So the path to the goal with a statistical crutch. But will two percent inflation be sustainable?
I think so, although there is a legitimate concern that when the energy prices and all the cost-saving tariffs disappear, inflation will not remain at some five or six percent. This would of course be unacceptably high. In my view, that cannot happen, because if it were to happen, we would simply leave the seven percent rate longer. The seven percent rate is so high that even if inflation were five percent, it would knock it down. The current rate is enough for that.
However, we have practically full employment, wages are growing rapidly, and the state is only promising savings. My question is whether there is a chronically inflationary climate in the Czech Republic that will dominate the country again when the CNB lowers rates?
That’s a valid argument, after all, it makes sense to me to hold current rates longer than the model suggests we should. To make sure we cool down the economy and move it back into low inflation mode.
What will be the moment when you will be sure?
For me personally, it will be a drop in core inflation, i.e. a rise in prices that do not include energy, one-off effects or food. As soon as I have sufficient certainty of a drop in core inflation to the target, I will say yes, we have tamed inflation. And at that point I will vote for gradual rate cuts.
Do you have an idea of a specific horizon?
If it will be at the end of this year or at the beginning of next year, I dare not say. It is possible that it will be already in the last quarter of this year. For some time we kept the interest rate below the model’s recommendation, now we will keep it longer than the model would recommend. Not long ago, he recommended eight percent, now he recommends seven, and the moment is approaching when he will recommend that we lower the rates. But I would prefer to keep them longer at the current level.
However, maintaining a seven percent rate for a long time will be toxic to the real economy in addition to inflation. Wasn’t it better to raise them more sharply last year and lower them this year?
We are creating such a sensitive scenario, and inflation is not as sensitive to the interest rate as it might seem. For example, if the rate had initially been eight percent instead of seven, inflation would have been lower by about 0.2 percentage points.
Doesn’t that call into question the effectiveness of monetary policy as such?
Kinda yes, but there are two channels. Interest rates and exchange rate. The course works faster, but is not very manageable. But the fact that the transmission is weakened here is a fact. Most of the loans to companies in the last few quarters are in euros and we have no leverage on them. On the contrary, we have a very strong influence on mortgages, for example, there is a 70 percent drop.
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And you actually want such a strong mortgage drop, isn’t that a bit of a misfire than you’d like?
It is not very good to operate only through such a narrow channel – to lower rates, start a mortgage boom, then raise them again and trigger a sharp mortgage cooling. Why the mortgage market should be the bearer of everything. I’d like to avoid that in the future, so I certainly don’t want to go somewhere near zero when rates go down, which has been the case in years past and created an artificial mortgage boom. I certainly don’t want that. On the other hand, the current mortgage market is somewhat symptomatic of inflationary expectations being lower than commonly reported. If people had really high inflation expectations now, why wouldn’t they run to buy real estate?
But haven’t people already done this in previous years? After all, real estate “enjoyed” inflation ahead of time.
But if you have a lot of money, or access to credit, why not buy real estate again to protect yourself? Or why don’t they buy more long-term assets? And we don’t see people buying en masse. On the contrary, we see that the same people who, for example, fill in the questionnaire that they expect ten percent inflation, go and save their money in the bank for five percent. Thus, their actions do not actually correspond to what they claim to expect.
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