Hampl explains that although inflation is exacerbated by the effects of the war in Ukraine, much of the upward pressure on prices comes from domestic demand. And the central bank must do something about it, it is its legal mandate, he recalls. According to him, there are at least three reasons why inflation is so high in the Czech Republic.
“We still have the hottest labor market in the European Union. We had the biggest difference between real wage growth and productivity. And that takes time. We had one of the public finance deficits the highest in 2021 – around 6%. This means very strong compensation for households and, at the same time, tax cuts. Everything was pro-inflationary.”
“And we also have a bigger share of property in our index, which is true. But Europe doesn’t have it that way and therefore by far the fastest growing property prices – 22% for the third quarter of last year – is reflected more in inflation. All these influences are domestic, they are purely Czech and the central bank just has to do something about it,” says a member of the National Budget Council.
According to Vávra, the central bank’s approach does not separate what part of inflation is caused by domestic politics and what is imported. The central bank must respond to both at the same time.
“Mr. Hampl has described the drivers of domestic inflation well. With the exception of the labor market, which is a chronic problem in our country, all the others were temporary, caused by the previous government and largely in the process of to fade. If the central bank does not respond to them at all, it will disappear over time. But now comes the opposite. After a very long time, the real specter of stagflation is coming to Europe (combination of high inflation and very weak economic growth, editor’s note) And it’s almost inevitable. And in this situation, we are raising interest rates in a way that is beyond rationality,” he says.
The central bank does not communicate
Also, according to Hampl, the word stagflace comes back to the dictionary. It offers a comparison of the current situation with the oil shocks of the 1970s in the United States, which were devastating.
“The 1970s taught central bank monetary policy an important lesson. Although the shock is staggering at first, it is simply imported inflation. energy commodity prices, there is still a need to anchor inflation expectations and rein in inflation, because otherwise it will hit double digits and you won’t get it back for ten years. “America’s experience. I’m glad the central bank is at least trying not to repeat the mistake,” he admits.
Hampl agrees that the risk of demand falling significantly is real. This year, he said, households may experience the fastest decline in real income since 1993.
“And it’s absolutely critical that the central bank be prepared, able to turn the helm quickly, so to speak. It’s been doing that so far. The key is that no matter what happens, there’s always those pressures from the domestic demand. And even if you subtract everything overseas, the central bank has to show the model right now that rates should be somewhere in the seventh range,” he thinks.
It is indeed absolutely essential that the central bank be ready, able to turn the bar, so to speak, quickly.
The dispute is not about raising interest rates, but about communication and the intensity of central bank actions, Vávra responds.
“You probably won’t find an economist advocating not raising interest rates in our situation. The whole thing is that instead of a fine nail file, as is unfortunately its sad As usual, the central bank has taken up the machete and made unprecedented leaps. The whole problem with the current situation of our National Bank is that it will not be able to lower rates any further. Compared to the situation in the real world , we have rates set too high, we have them set after jumps that are too brutal”, describes the investor.
He reiterates criticism that the central bank is not communicating. “He tells us such obvious truths that he has to destroy the mortgage market and that the war in Ukraine will slow down growth. I really don’t know what they are doing,” adds Radovan Vávra, former CEO of Komerční banka.
Other braking options
Hampl agrees that the rise in interest rates is strong. And I can imagine the central bank apparatus offering even higher rates right now because we also have unprecedented inflation, he says.
“If you want to slow down under normal circumstances, interest rates have to be higher than inflation, not lower. But we’ve gotten so used to higher interest rates because we’ve been a stable economy for a long time. with low levels of debt and low inflation that we find that shocking and that’s exactly why I think ninety percent of the outcome would be through communication and then ten percent through increase in the tariff itself,” he explains.
According to him, the central bank should also use other options to fight against inflation. “She should use the second brake tool, which is currently available. And that’s called the exchange rate. That’s what’s happening, but it may take a bit more and push more on that leg than on the interest rate leg,” he says.
How will CNB actions affect the availability of mortgages and owner-occupied housing? Listen to the whole debate. Moderated by Lukáš Matoška.