Czech bank governor talks up earlier interest rate rises

Czech central bank governor Jiří Rusnok has hinted that an interest rate rise could be coming sooner than expected amid an unexpectedly feeble crown and soaring local wages.

Jiří Rusnok, photo: Filip JandourekJiří Rusnok, photo: Filip Jandourek Without giving too much of the central bank guessing game away, Rusnok has said that the combination of a weaker than expected crown and higher than expected wage rises made room for an earlier rate rise.

A further rate rise, probably of the almost now customary 0.25 percentage point, has clearly been on the horizon for some time by the end of this year. But Rusnok’s previous somewhat enigmatic comments gave the impression that this could come towards the end of the year rather than earlier.

The weakness of the crown is probably the single main factor in creating wriggle room for an earlier rate cut. On Wednesday the crown was strengthening to around 25.6 crowns/euro, a firming which has been taking place since the end of May. But this relatively short run was preceded by a weakening since mid –April when the Czech currency has slipped to below 25.3 crowns/euro.

The Czech National Bank previously forecast that the average rate of the crown against the euro for 2018 would be 24.90 crowns/euro, that’s an indication of the gulf that at the moment exists between the central bank expectations and the reality. But foreign exchange markets can swing around rapidly and clearly an earlier rate cut would help put that earlier prediction on the path to realisation.

The second factor in Rusnok’s earlier rate rise equation, wage rises were shown to be still buoyant with first quarter rises of an average 8.6 percent, in real terms 6.6 percent when inflation is removed. These are the highest levels since 2003.

The median wage, giving a better idea of real rates in the workplace by reducing the distortion caused by the very highest wages on the average, rose by 8.3 percent, suggesting that many at the lowest end of the earning ladder are exerting pressure for relatively substantial increases.

But the still sizable gap between the median wages for men, 28,031 crowns, and women, 23,084, suggests that wage discrimination is still a significant factor. In all economies, average and median wages for women are usually lower given the fact that they are still more often working part time.

Many of the highest wage rises have recently been in state sectors, with the government making up for freezes and curbs on pay increases for civil servants, teachers, and health workers. But the rate of these rises can be expected to slow down once a certain level of catch-up is achieved.

Another set of figures from the Czech Statistical Office adds more colour to the picture of an economy operating at full capacity. The average employment rate is 74.2 percent in the 15-64 age category, a record rate. The number of jobs on offer at labour offices at the end of April was more than 267,000, another all-time record. The rate of graduate unemployment stands at 1.2 percent, statistically speaking almost non-existent.