President Milos Zeman has the power to cause a major upset to the current balance of the Czech National Bank (CNB) board in July, as the terms of three board members expire at the end of June, including that of CNB governor Jir Rusnok, which will be his second and last spell on the board. While we see an upset as unlikely, given that everyone currently serving on the board was appointed by Zeman, we cannot rule out such a scenario completely. There has been an emerging debate among local economists about whether the CNB board isn't too hawkish under current circumstances, so we expect that there will be at least an attempt to lobby Zeman for the appointment of more accommodating board members. Our base scenario is that there will be only one new member on the board in July, but we cannot leave other possibilies entirely aside.
Current state of the board and upcoming term expirations
The CNB board consists of seven members, one of whom is the governor, and there are two deputy governors. All board appointments are made by the president. The process has been usually very opaque, as the president has full discretion whom to appoint. The official comment from Zeman's office has always been that Zeman is making this decision after consulting with his economic advisors. Yet, we saw a successful lobbying attempt in late 2018, when then PM Andrej Babis managed to have Ales Michl, his personal financial advisor, appointed as a board member. Michl is rather an exception to the rule, however, and the CNB board has always enjoyed a very solid reputation.
Three board members will see their terms expire on Jul 1 - governor Jiri Rusnok, deputy governor Tomas Nidetzky and board member Vojtech Benda. Rusnok is not eligible for reappointment, because this is his second term, and the CNB law doesn't allow board members to serve for more than two terms. Nidetzky and Benda are in their first term, and both are Zeman appointments to begin with.
There are two more board members whose terms expire soon - deputy governor Marek Mora and board member Oldrich Dedek, whose terms expire in February 2023. This is going to be technically right at the end of Zeman's presidential term, which expires in March, but we expect he will be the one to make the CNB board appointments anyway. Dedek is not eligible for reappointment, as he is also serving a second term, while it is the first one for Mora. The next terms that expire are in December 2024, so they will be a matter the next president will have to deal with.
A table with details about all board member terms follows below:
Board member views and current balance
Currently, the CNB board has a very hawkish stance, with five of the seven board members supporting the monetary tightening cycle that launched in June 2021. There is only one clear dove on the board, Oldrich Dedek. Ales Michl started as a hawkish member, but he has gradually turned into a swing vote. Everyone else is hawkish to some degree. Rusnok is perhaps the least hawkish in that group; Nidetzky had a more balance stance before the pandemic started, but he has become increasingly hawkish, even though he very rarely dissents from the board majority. Holub and Mora are fairly hawkish, while Benda is the most outspoken hawk on the board.
We provide a table with voting patterns below. The last two columns show the cumulative deviation from board majority (voting more hawkishly offsets the score by +1, while more doveishly - by -1), and the total number of deviations. We believe it illustrates well the contrast between Benda and Dedek on one side, who have been very consistent in their hawkish and doveish views, respectively, and Michl on the other, who has swung between voting more or less hawkishly than the rest of the board.
As you can see, the departure of Rusnok in the middle of the year will not upset the board too much, if he is the only one to leave. However, if Nidetzky and Benda are both to be replaced, it will have considerable implications for the board's overall stance, in case the replacements have more doveish views.
Zeman is unlikely to cause a big shift, but probability of an upset is more than zero
So here comes the million-pound question - will President Milos Zeman use the opportunity to cause a major rearrangement on the CNB board? The short answer is - most likely no.
Zeman is not known for taking huge risks, and the CNB's very solid reputation has been mostly because presidents have abstained from political interference in the CNB board on a large scale. Furthermore, everyone who currently serves on the CNB board was appointed by Zeman, so he has already vetted Nidetzky and Benda and doesn't need to do so again. In addition, Zeman has been favourable towards promoting talented CNB officials, as is the case with Benda, so he has no reason to be unhappy with his choice. Zeman has always said when making two appointments to the CNB board that he is picking one from within the CNB and the other - among professionals outside the central bank, as was the case with Nidetzky, who has extensive experience in the bank sector.
However, circumstances are currently far from ordinary. There has been an emerging debate whether the CNB board is not too hawkish during the current crisis. We are seeing a growing number of local economists who openly disagree with the CNB's policy decisions and believe that it should put an end to its monetary tightening cycle. The most frequently mentioned argument is that the current wave of inflation pressure is almost entirely due to external factors (the energy price hikes caused by the war in Ukraine), which makes monetary policy much less effective. Some have expressed concerns that the CNB could cause a major recession by keeping interest rates so high and for so long.
What we expect is that there will be at least an attempt to lobby Zeman to make changes to the board, given that he has a good opportunity to do so. We don't believe Zeman is easily swayed, as he has the reputation of being stubborn. Also, the influence of Andrej Babis has decreased, as he seems to have fallen out with Zeman after he continues to be evasive about running for president. However, we cannot completely discard the possibility that he might be inclined towards bringing more balance to the board, which is very overtly hawkish at the moment (see the previous section).
In the end, we expect that the new board member, to replace Rusnok, will be likely less hawkish than what we are currently seeing on the board. There have already been speculations about Vladimir Dlouhy, the president of the Czech Chamber of Commerce, who was rumoured to take over as governor after Rusnok leaves. Dlouhy has been on record criticising the pace at which the CNB has tightened monetary policy, but he didn't oppose tightening in principle, only its magnitude. Thus, we do not consider Dlouhy as a straightforward dove, though he likely has more doveish views than most of the current board members. Zeman has also suggested he would consider promoting an already existing board member as governor, which gives weight to our base scenario that Nidetzky and Benda will be reappointed.
Who can become the next CNB governor?
Given that there is a possibility that President Zeman may promote an existing board member to governor, there are certain legal limitations that need to be considered. Before we continue, everything in this section was cross-checked with the CNB, so consider what we outline below as official.
You may have noticed that while governor Rusnok is serving his second term, his first term lasted only two years. The reason for that is Article 14.2 of the Statute of the European System of Central Banks and the European Central Bank, which requires that central bank governors should have a term of no less than five years. The way this has been applied in the Czech Republic is that when a board member needs to be promoted to governor, they need to resign from their current term and then be immediately reappointed for a full 6-year term as governor. This is what happened with Rusnok in 2016, when he had already been a board member for two years.
This leads to another legal implication, namely that only board members serving their first term can be promoted because otherwise, it will be their third term, given that no one can serve for less than five years, and the CNB act only envisages six-year terms. When applied to the current CNB board, it means that anyone besides Rusnok and Dedek (who is also serving his second term) can be promoted to governor. It will be the easiest with Nidetzky or Benda, since their terms expire at the end of June anyway. However, Zeman could easily pick someone like Mora, for instance, whose term expires next February. In any case, if neither Nidetzky nor Benda are appointed as governor now, they will never be at the helm of the CNB.
As far as deputy governors are concerned, they are considered as any regular board member from a legal point of view. It means that the legal restrictions for governors do not apply to that position, and any board member can be promoted to deputy governor for any period of time. The aforementioned statute deals only with governor terms. In addition, the Czech Constitutional Court has already reviewed the issue and its conclusion confirmed the existing practice at the CNB. We note this in case either Nidetzky or Mora becomes the next governor, which means someone will need to be promoted to deputy governor in their stead.
As we noted at the beginning, our base scenario is that there will be only one new CNB board member this summer, and that Nidetzky and Benda will be reappointed. We believe there is a fair chance that Nidetzky may head the CNB after Rusnok, but we do not rule out a scenario where someone else is promoted, like Mora, for instance, or there to be an entirely new appointment. The CNB governor's role is not very extensive, even though they are technically presiding over the board. The only situation when it matters a lot who is the governor is in case of a vote tie, when the governor has a decisive vote. However, this can happen only when a board member is not attending, something we haven't seen over the past five years.
We are fairly confident in our base scenario, because politicians have very rarely tried to interfere with the CNB, and there is likely to be public outcry in case they do. The CNB has had a spotless reputation so far and is one of the most trusted public institutions. It is the reason why we expect that President Zeman will respect tradition will not make major changes to the CNB board this summer. Zeman will have more opportunities to appoint new members, given that Dedek's second term expires next February, which is why we doubt he will abuse his position.
It may be a different situation if Andrej Babis becomes president, but it is something far from guaranteed, and we will deal with that scenario if it occurs.