Zamrazilová: If the CNB predicts a 10 percent increase in wages, there is a risk of a tightening of monetary policy

In the estimate of key indicators published on February 3, the Czech National Bank stated that it expects this year’s nominal wage growth of 8.5 percent, which would mean a real decrease of 0.4 percent.

According to recent data from the Czech Statistical Office, the average wage in the Czech Republic rose nominally by 6.5 percent year-on-year last year. Due to the increase in prices, however, it fell by 7.5 percent in real terms.

“The current forecast foresees an increase (of wages) of 8.5 percent. If this estimate were to increase significantly, let’s say more than ten percent, then I am afraid that this would really be a reason to further tighten the rates,” specified Zamrazilová.

“We have to analyze what is happening in the labor market in great detail, because that is one of the main sources of inflationary pressures. We have only one piece of information so far, and that is wage growth in industry and construction, which was over ten percent in both cases. We need to take a closer look at the structure of which part of enterprises had such high wage growth and try to find out whether it was, let’s say, an anomaly or whether it will be a persistent trend,” she described.

“For me, this is an important signal that I will consider further tightening of monetary policy rates, although we won’t have the exact numbers and the new wage growth forecast until early May,” she said.

The CNB last raised the base interest rate last June, to seven percent.

At the beginning of February this year, Governor Aleš Michl said that the bank board will consider at the next meeting whether to keep the rates at the current level or increase them. The Bank Council will have another debate on the setting of interest rates on March 29.

According to Zamrazilová, the CNB sees further risks for inflation in the tight labor market. She recalled that only in January, after five years, did the number of unemployed exceed the number of vacancies.

She repeated that the CNB expects inflation to fall in the second half of the year, when the increase in interest rates from last year will be reflected. The high comparative base from last year will also help reduce inflation.

Inflation should reach the inflation target at the beginning of next year. According to her, another inflationary impulse is represented by a too loose budgetary policy. “Public finances send too much money into the economy, which is also an inflationary impulse,” she pointed out.

According to the vice-governor, foreign countries are another source of concern about the effect on inflation.

She pointed out that in its December report, the European Central Bank moved up the inflation outlook for this year and next year, and at the same time delayed the fulfillment of the inflation target until the end of 2025. “So there is a real risk that we will import inflation from abroad,” she said.