Czechs should switch and start preparing for a period of lower interest rates. In other words, cheaper mortgages, but also bank accounts with lower interest rates. According to Rusnok, this must happen as a result of the expected drop in inflation, and the central bank is making a mistake if it wants to delay this development.
The price of money in the entire economy depends on CNB rates, and the bank has kept its basic interest rate at seven percent for more than a year. At the same time, however, he promises that inflation will fall in the first half of next year to the former normal of around two to three percent.
In such a situation, according to Rusnok, it is time to order a turnaround, otherwise there is a risk that money will remain expensive for too long, and this will unnecessarily suffocate the stagnant economy. “It is appropriate to at least signal when the reduction will occur,” he told Seznam Zprávám when asked about the current development of monetary policy.
The CNB Banking Council discussed rates this Wednesday and kept them at seven percent. Just like every time since the new governor Aleš Michl took office last July. No one expected a reduction this time, but many economists, like Rusnok, were already looking forward to a clear word on how the bank will react to the announced end of the wave of price increases.
Jiří Rusnok
- from April 2001 to July 2002 – Minister of Finance,
- from July 2002 to March 2003 – Minister of Industry and Trade,
- from June 2013 to January 2014 – Prime Minister of the caretaker government,
- between 2016 and 2022 – Governor of the Czech National Bank,
- from February 2023 – advisor to the board of directors of Allianz pojišťovna.
- He was born in 1960, was born in Ostrava, is married, and has three children.
Michl and bank board member Jan Procházka instead only reiterated that the rates will remain unchanged until it is certain that the previous abnormal rise in prices is truly gone. “Inflation is still at unacceptable levels,” Michl said, among other things, after Wednesday’s meeting. He repeated that he mainly wanted to be sure and that he would not mind if the CNB’s strong policy led to a reduction in inflation, perhaps even below two percent.
Asked about future releases, Michl said Wednesday that his team has a “clear strategy.” But he revealed only that “every next session will be unique” and that it will depend on newly arrived data on the development of the economy.
This is what we pay the central bank to do – to see further than the rest of us and act ahead of the curve.
After the end of Rusnok’s mandate last June, the banking board was almost entirely replaced. Michl previously worked for over three years as an ordinary member of the bank board, and Rusnok tried to reverse his promotion last year. However, the selection of the heads of the CNB is fully within the competence of the president, and Rusnok failed to talk Miloš Zeman out of his choice. He then justified his reservations by saying that Michl “doesn’t know how to treat people, comes across as choleric and is not personally equipped to manage such a large institution.” Michl, on the other hand, criticized the previous management of the bank for the fact that it had poor results in the fight against inflation.
But now Rusnok emphasizes about his remarks that “it is not a robust conflict”, but only a professional dispute regarding the nuances of monetary policy and the chosen tones and accents in communication.
Rusnok already had reservations about setting rates in the second half of last year. He recommended continuing to raise interest rates, and the CNB’s expert apparatus initially gave Michl’s council the same recommendation. Seven percent seemed like little at a time of rising double-digit inflation. “If the CNB had been more active then, I am convinced that we would have suppressed inflation faster and we would not have had to keep rates high for so long,” says Rusnok looking back on last year’s procedure.
Now, for a change, he blames the Bank Council for not talking about the drop in rates in time. In principle, however, it is a complaint of the same nature, i.e. due to further passivity. Changes in interest rates have a great influence on the behavior of commercial banks, but they are usually fully reflected in the economy only with a delay of a year or a year and a half. Therefore, Rusnok considers it a mistake to keep interest rates at seven percent at a time when inflation is soon to fall to two percent, and not to talk about their early reduction. He describes the prolongation of the era of high rates as a “very strong restriction” that will unnecessarily delay the recovery of the economy. “That’s what we pay the central bank for – to see somewhere further than the rest of us and to act ahead of schedule,” adds the ex-governor by way of explanation.
Among economists who follow the actions of the CNB, its approach is evaluated differently. “I was a little bit expecting that they would somehow start the communication. So I agree – I think it is wrong to delay communication regarding future rate cuts,” says Pavel Sobíšek, UniCredit Bank economist and chairman of the Advisory Committee for Budget Forecasts. On the other hand, however, he points out that the big central banks in the USA and the EU have recently “darkened” their communication and that the haste of the CNB could sway the exchange rate of the koruna or undermine the public’s confidence in the fact that inflation will really fall next year.
