The possibilities of the Czech central bank do not give the dove governors a free hand

The possibilities of the Czech central bank do not give the dove governors a free hand

On Wednesday, the Czech president filled three positions on the central bank’s board, easing market concerns of a strong dovish shift after the current board boosted interest rates to combat the highest inflation in nearly three decades. The additions to the Czech National Bank (CNB) include two former central bankers, a choice that adds predictability after the unexpected appointment of board member Ales Michl as new governor starting in July last month. Michl has criticized the bank for raising interest rates by 550 basis points in the last year, despite one of Europe’s largest inflation jumps, claiming that price increases were primarily imported.

Two of the appointees chosen by President Milos Zeman, who has the sole authority to name the board, are women, the first time the board will have two female members. One is Eva Zamrazilova, a right-wing economist and chief of the country’s fiscal prudence council who held more hawkish opinions than her colleagues during her 2008-2014 term on the board.

The new names do not indicate a dovish wing is automatically getting an upper hand on the seven-member board, a concern that contributed to a 3.7% drop in the crown’s exchange rate after Michl’s appointment which forced the bank to intervene in the market.

The other is Karina Kubelkova, an economist with a background in economic policy and macroeconomic forecasting now at the country’s Chamber of Commerce. She said in a March note that there was a domestic element of inflation, and she expected an “effective monetary policy of the CNB” to prevent the risks of even higher inflation. The third new member is Jan Fruit, head of the central bank’s financial stability department who served on the board from 2000-to 2006.

Chief Economist Pavel Sobisek of UniCredit said markets may be calmed by two experienced central bankers rejoining the board. “It is positive that uncertainty ends and also that this body will move toward gender diversity,” he said. Zeman did not give second six-year terms to Vice-Governor Tomas Nidetzky and board member Vojtech Benda, who backed the bank’s interest rate tightening to 5.75%, together with outgoing Governor Jiri Rusnok.

He was dovish, but that included a period when the crown was appreciating and the central bank was undershooting its inflation target, said economist Jaromir Sindel of Citi Research. “We would perceive these nominations as not being dovish,” he said in a note before the appointments. “We think this Bank Board composition could avoid the CNB being far ‘behind the curve’ if demand-side inflationary pressures strengthen. This could ease the crown’s risk premium.”

The new members will take office after the bank’s June 22 policy meeting, where the board is expected to raise interest rates further. Michl has signaled he would propose rate stability after he takes over, also provided that rates will have risen substantially already. Czech inflation jumped to 14.2% year on year in April and is expected to reach 15% around the middle of this year before beginning to cool off.

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