Czech Central Bank Chief Embraces Tight Policy, Austerity

(Bloomberg) -- Monetary policymakers should keep interest rates higher than pre-pandemic levels and governments need to exercise discipline to prevent the return of a cost-of-living crisis, the Czech Republic’s central bank chief said.

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Czech National Bank Governor Ales Michl said on Friday that lingering inflationary pressure is the result of excessively loose monetary policies over the last decade that saddled the global economy with too much money. The central bank this week delivered an eight-straight rate cut, but Michl signaled that a halt to the easing cycle was in sight.

“The policy mix for the future should be, firstly, keeping interest rates higher than before Covid for the next 10 years,” Michl told Bloomberg Television in an interview in London. “Secondly, which is also important, governments must balance their budgets. Because if they don’t do it, there could be the risk of a second wave of inflation.”

European policymakers are bracing for economic turbulence — including the prospect of a trade conflict — with the reelection of Donald Trump to the US presidency. In the Czech Republic, central bankers are grappling with a worsening outlook as key export market Germany struggles — and weighing it against persistent price pressure.

While inflation is being driven by volatile food costs and temporary effects, officials are pointing to rising prices of services and a rebounding housing market as grounds to remain cautious.

Michl said the best way to ensure price stability in a small and open economy like the Czech Republic is through budget austerity, which will also curb underlying domestic pressures.

Core inflation should remain “slightly below” the central bank’s 2% target, Michl said. Rate setters are discussing when to bring rate cuts to halt, since that goal hasn’t been met, the central bank chief added, declining to provide a timeframe for a potential policy shift.

The threat of tariffs from a new Trump administration may shake up the European automotive industry, on which the Czech Republic relies heavily for exports, according to Michl. He criticized carmakers for what he called their focus on climate targets and regulations rather than boosting competition with electric-vehicle producers like Tesla Inc. and Chinese companies.

“I expect some creative destruction in the automotive industry in Europe,” he said. “Maybe automotive sector will be a sad example of how regulation can harm an industry.”

The governor also reiterated his plan to increase the central bank’s gold holdings to about 100 tons in the next three years to diversify reserves. At $150 billion, the reserves are among the largest in the world relative to the size of the economy. The bank is also gradually raising stock holdings to boost the expected return on the reserve portfolio.

“At the same time we need to reduce volatility,” Michl said. “And for that, we need an asset with zero correlation to stocks, and that asset is gold.”

The Czech currency has been more resilient than its regional peers to swings in global sentiment toward riskier assets. The koruna gained as much as 0.2% to the euro on Friday, outperforming east European counterparts that mostly weakened.

--With assistance from Deana Kjuka and Andrea Dudik.

(Updates with more comments starting in third paragraph.)

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