Czech central bank choices offer no carte-blanche for dovish governor

The Czech president filled three seats on the central bank's board on Wednesday with economists likely to ease market worries about a sharp dovish swing after the current board raised interest rates to tame the highest inflation in nearly three decades. The appointments to the Czech National Bank (CNB) include two former central bankers, a choice adding predictability, and follow a surprising choice last month of board member Ales Michl as new governor from July.

The Czech president filled three seats on the central bank's board on Wednesday with economists likely to ease market worries about a sharp dovish swing after the current board raised interest rates to tame the highest inflation in nearly three decades.

The appointments to the Czech National Bank (CNB) include two former central bankers, a choice adding predictability, and follow a surprising choice last month of board member Ales Michl as new governor from July. Michl has opposed the bank's 550 basis-point interest rate rise over the past year amid one of Europe's biggest inflation spikes, saying price growth was mainly imported.

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. 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 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.

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." 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. 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.