The election of the Governor of the Czech National Bank is always an extraordinary event for the business world and an extraordinary power of the President of the Czech Republic. It is these days that Miloš Zeman is deciding who will replace the current governor, Jiří Rusnok, from the first of July.
The current vice-governors are Tomáš Nidetzký and Marek Mora, a member of the board Aleš Michl and the head of the Chamber of Commerce Vladimír Dlouhý.
The current choice is extraordinary for several reasons. The Czechia is facing record inflation, and the continuing rise in energy prices and rising producer prices make it clear that the latest March inflation of 12.7 percent is definitely not a ceiling. The economy is still recovering from the covid period and is newly affected by the consequences of the Russian invasion of Ukraine. Estimates that inflation will attack the 15 percent level are realistic.
The central bank is legally responsible for price stability in the country, and its behavior is so crucial in finding an answer to the question of how long and how high the inflation wave will hit the Czech Republic. Therefore, in order to fulfill its statutory task, it enjoys extraordinary independence, and once appointed board members and the governor are virtually irrevocable during their six-year term.
There’s a reason for that. In pursuing its goal, the central bank often becomes the target of criticism by companies, the public and politicians. The fight against inflation, the pernicious consequences of which each of us is currently experiencing, has its costs. They make loans to companies more expensive, loans to residents are more expensive, and raising rates would, under normal circumstances, further strengthen the koruna’s exchange rate and thus bother exporters. Higher rates make government debt financing more expensive and may complicate efforts to stabilize public finances.
But if the central bank succumbed to these pressures and gave up its main task, it would have much tougher consequences for the economy than making loans more expensive. More expensive money is not such a problem for companies as rising raw materials and the persistent shortage of people in the labor market.
President Zeman is electing a new governor at a time when the CNB’s Bank Board is divided on how to deal effectively with inflation. Five members, including the governor, support raising rates, with two members opposed from the start.
Governor Jiří Rusnok, who has a friendly relationship with Zeman since he was prime minister of his caretaker government, will undoubtedly have a strong voice in the search for his successor. This has been the case with other governors in the past, and it is good for the central bank’s continuity and predictability.
Rusnok would like to see Vice Governor Tomas Nidetzky instead and offers Vice Governor Mark Mor as an alternative.
By choosing one of the vice-governors, the president would certainly not make a mistake, he would support the current policy of the CNB and maintain an important continuity in the highest levels of the CNB in these turbulent times. But it would not be Miloš Zeman who would not have other candidates and preferences up his sleeve. Despite Jiří Rusnok.
By the end of his term, Zeman will have five seats in the Bank Board out of a total of seven members. This year there are three (Governor Jiří Rusnok, Vice Governor Tomáš Nidetzký, member Vojtěch Benda) and next year (Vice Governor Marek Mora and member Oldřich Dědek). It can thus fundamentally affect the current composition of the Bank Board, which, despite two rebel members, Aleš Michl and Oldřich Dědek, has set out on the path of raising rates and taming inflation.
Vladimír Dlouhý, the Minister of Industry and Trade from the 1990s, the current head of the Chamber of Commerce and a long-time adviser to the global investment bank Goldman Sachs, is also a strong candidate.
From a professional point of view, Dlouhý cannot be blamed for much. However, if Miloš Zeman had elected him, it would be the first time in history that someone had taken the post of governor from the street, ie without previous experience from the bank board. In addition, when choosing Dlouhý, it would be logical for Zeman to send other new people to the council with him, so that he could rely on related people in his decision-making.
During a recent meeting at the Castle, which was attended by Governor Rusnok and Vladimir Dlouhy, who is also an adviser to Milos Zeman, the president should have made it clear that he was not too inclined to further raise rates. Not surprisingly, in the last interview for Seznam Zprávy, Vladimír Dlouhý also spoke in the same spirit. According to the interview, Dlouhý, from his position as governor, would not take action against inflation by further raising interest rates, and even talks about shifting the CNB’s inflation target from two to three percent. This would already be a significant change in the current behavior of the central bank.
Another member of the Bank Board, Aleš Michl, is to be another candidate for the post of governor.
With regard to the fact that his only companion on the Bank Board, Oldřich Dědek, will definitely end in February next year, the same applies to him as to Dlouhý. If Zeman elected him, a more significant change of bank board could be expected, because the governor cannot lose the vote in the long run, as Michl has shown since the beginning of the increase in interest rates. With the election of Michl, who is close to the former Prime Minister Andrej Babiš from the time when he acted as his adviser, the functioning of the Bank Board and the CNB could deviate much more significantly from the current exchange rate.
According to available information, the verdict on the new governor should fall within the next month, but it is not excluded that President Zeman will enjoy the situation until the last moment. We can only hope that at this time, with its choice, it will support the central bank’s independence and its determination to curb high inflation, as required by law.
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