The CNB’s reasons for maintaining the level of interest rates are insufficient, claims MEP Niedermayer | iRADIO

In its regular assessment of the Czech economy, the International Monetary Fund stated on Friday that in order to decisively tame inflation, further increases in the basic interest rate of the Czech National Bank (ČNB) are needed in the near future. However, the majority of the Bank Board considers the current seven percent base rate level to be high enough. “Inflation is a great and dangerous evil,” says MEP Luděk Niedermayer (TOP 09) in an interview with Radižurnál.



Prague
21:55 January 24, 2023

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MEP Luděk Niedermayer (TOP 09) | Photo: Kateřina Cibulka | Source: Czech Radio

Which side of the debate on whether or not to raise interest rates are you on?
Assessing this situation from the outside is difficult, because monetary decision-making is based on very deep analyses. I read and pondered over them for many hours as I prepared for the meeting.

The economy and citizens will be harmed the most if temporary inflation becomes permanent inflation, says Luděk Niedermayer, MEP (TOP 09) and former vice-governor of the Czech National Bank

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It’s really impossible to give advice from the outside. The International Monetary Fund looked at our economy a few months ago, and the European Central Bank has a very similar approach, which started raising rates much later than our central bank.

It was a big mistake, but now it leaves the markets in no doubt that interest rates need to be raised until it is clear that inflation is coming down. Most analysts share the same opinion.

What worries me the most is that the central bank publishes some of its analyses. And the last published analysis also assumed that interest rates were to go up, even to somewhere around 8 percent. So I dare not say that it is a bad decision.

In the last few weeks, there has been one big change. Energy prices fell, and energy was the initiator of high inflation. The situation may be a little different now and it requires a rethink.


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But the CNB’s rhetoric that it is better not to raise interest rates and leave them alone has been going on for many months and, in my opinion, is not sufficiently justified and therefore not sufficiently credible.

Unlike the current leadership of the central bank, don’t you think that a higher base rate would already be counterproductive because it would already stifle the economy too much?
Above all, there is a clear consensus in the world of economists and central bankers that the inflation that much of the world now faces is a very dangerous evil. At worst, it can happen that inflation, which is caused by a combination of several factors, spills over into so-called high inflation expectations.

This means that people stop seeing it as something temporary and start taking it as something permanent. From this point of view, 10 percent inflation works very well, because everyone can imagine what it means to have prices, wages, and everything increase by 10 percent a year. Then taming inflation is terribly difficult.

We should be having a legitimate debate about whether today’s level of interest rates is sufficient for inflation to start falling quickly and visibly.

The discussion that it is not possible to raise interest rates because it would hurt the economy is not entirely appropriate in my opinion. Because what would damage the economy and the citizens the most would be when the temporary inflation becomes permanent inflation.


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What do you think is the probability that the Bank Board will decide to increase the base interest rates on February 2?
I dont know at all. I think that energy can also play a really big role. Now there is some uncertainty as to whether we are seeing a temporary development as gas prices are low. We know that even in our commercial market, consumers are offered an electricity tariff that is lower than the ceiling set by the government. This is a really positive development.

The question is whether there is any chance that this will translate into a reduction in inflationary pressures. Otherwise, I think the rate hike should happen and I would quite expect the central bank to do it eventually. But I’m not really one to follow it closely anymore. It’s more my intuition.

If the International Monetary Fund is urging us to raise interest rates or risk an inflationary disaster, is that unnecessarily alarmist or not?
It’s not quite a disaster. In particular, the drop in energy prices opens up the legitimacy of the discussion as to whether this will help us reduce inflation. But at the very least, it’s notable that a lot of analysis and people’s opinions, which are good to listen to, say that it would be better if interest rates were a little bit higher.

I’m not saying it’s the end of the world. It may well turn out that some factors will come true that we can’t really see now, or something will surprise us and it will turn out that we can manage with the seven percent. Considering how many sane competent people think it would be better to go a bit higher, it would be wise to pay attention to that.

What impact will the introduction of the US inflation reduction law have on Europe? According to Luďek Niedermayer, what is the future of the single European market? Listen to the full interview in the audio above.

Vladimír Kroc, tech

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