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Policy dove Michl tipped to lead Czech central bank -news website, sources

·3-min read
FILE PHOTO: The Czech National Bank is seen in central Prague

By Jan Lopatka and Robert Muller

PRAGUE (Reuters) -Czech National Bank board member Ales Michl, known for opposing interest rate hikes over the past year, will be appointed as the bank's new governor by President Milos Zeman, news website seznamzpravy.cz reported on Friday.

The website said it had obtained the news from sources familiar with the results of Zeman's meetings with candidates for the central bank's top job, which will open in July when the term of current Governor Jiri Rusnok ends.

Three people in the financial community told Reuters they had also heard that Michl, 44, would be appointed, although they said they did not have direct knowledge of the process.

If confirmed, the move would be a big surprise given Michl was not seen as a top candidate for the post.

The central bank had no immediate comment and a spokesman for Zeman - who has the sole authority to appoint the governor - declined to discuss the matter. Michl did not immediately answer a request for comment.

The crown was trading at 24.910 per euro, 1.5% down on the day, and the weakest level since March 14.

Prior to his appointment to the bank's board in 2018, Michl worked as a financial journalist, economist at Raiffeisenbank, set up an investment fund and advised former finance and prime minister Andrej Babis.

Michl has been at odds with the majority on the board, which has raised rates by 550 basis points since last June to 5.75%, with the latest hike coming on Thursday in its campaign to tame inflation, which the bank forecast would touch 15% in June.

The extent to which such an appointment would change the bank's course depends on who takes the seats of Vice-Governor Tomas Nidetzky and board member Vojtech Benda, both part of Rusnok's five-strong majority on the board throughout the rate-tightening cycle.

If Zeman appoints other dovish central bankers to the board, he could create a clear anti-tightening majority.

"If (Michl) becomes governor, and we don't know whether others will be replaced or continue, the uncertainty whether the Czech National Bank's monetary policy will continue in the current course is very high," said David Marek, chief economist at Deloitte CZ.

"That is a problem, especially because it diminishes the central bank's reputation, it endangers the trust in its ability to lower inflation, and it can contribute to a rise in inflation expectations," he said.

Nidetzky's and Benda's terms end together with Rusnok's, although they could both be re-appointed for another six years.

GULF OF DIFFERENCE

The gulf in opinion between the board majority and Michl was apparent at a news conference after Thursday's policy meeting, where Rusnok said giving up on rate hikes "would be resigning on the (bank's) mandate as a guardian of price stability".

Michl has argued, however, that the economy was below potential after the COVID-19 slump, price shocks were coming from the supply side, and the war in Ukraine was another shock speaking against rate increases.

"The cost-side character of current inflation, newly amplified by the military conflict, will continue to make it impossible to tame through interest rates," he wrote in daily Mlada fronta Dnes last month.

"At the same time, growth in interest rates will deepen the drop in economic output and raise the cost of state debt financing."

He argued that inflation could be tamed through lowering of fiscal deficits, avoiding growth in wages that exceeds productivity gains, and ending the supply-side shocks from the war and supply-chain disruptions.

Michl, who studied finance at Prague University of Economics and Business, has also brought up several unorthodox ideas for the central bank.

He has called for more active management of the bank's foreign exchange reserves to bring higher yield.

He also proposed sending part of the bank's 2019 profit to the state budget, although the bank was obliged by law to give preference to covering its past losses.

(Reporting by Robert Muller; Editing by Hugh Lawson, Tomasz Janowski and Emelia Sithole-Matarise)

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