Czech Republic: Zeman to appoint three new CNB board members, but balance will not change a lot

• New members are Eva Zamrazilova, Jan Frait and Karina Kubelkova
• Zamrazilova and Frait have already served one term on CNB board; it will be Kubelkova's first
• Zamrazilova is an outspoken hawk, while Frait - a straightforward dove
• Kubelkova appears to be balanced, with a somewhat hawkish lean
• New appointments to shift board bias to more doveish, but not enough to give Michl a majority
• We consider the new picks as having strong integrity, and we expect a positive market reaction

President Milos Zeman is apparently going to carry out an overhaul of the CNB board, but it is not going to be as profound as some have feared, according to sources of Hospodarske Noviny, a business newspaper. We consider the newspaper as very reliable,?and it has already revealed information about Zeman's plans, back on May 27. The appointments will be revealed at 14:00 CET (13:00 London time) on Wednesday (Jun 8), at the presidential palace. According to Hospodarske Noviny, the three new board members are Eva Zamrazilova, Jan Frait and Karina Kubelkova. Zamrazilova and Frait have already served once on the CNB board - Zamrazilova in 2008-2014 and Frait in 2000-2006 - so it will be a second (and final) term for both.

New board member profiles

Eva Zamrazilova:?Zamrazilova currently heads the Czech Fiscal Council, an independent body that verifies state budgets and the government's macroeconomic forecasts, as per the fiscal responsibility act. During her stay at the CNB, Zamrazilova was an outspoken hawk, and voted as hawkishly as one could go. She was also a vocal opponent of the CNB's one-end fx commitment applied in 2013-2017, as well as of the policy to maintain interest rates low for a long period of time. In fact, we would argue that Zamrazilova is a bigger hawk than Vojtech Benda, who has been leading the hawkish majority on the current CNB board.

This poses a question, which don't believe will be answered. If Zamrazilova is essentially the same as Benda, why not simply give Benda a second term? Because Ales Michl said so? Replacing Benda with Zamrazilova doesn't make a lot of sense to us, even more so after accounting for the fact that Zeman refused to reappoint Zamrazilova back in 2014. Zeman's arguments back then were that the CNB needed to think not only of its price and financial stability mandate, but also of economic activity and promote it. Zamrazilova has always been arguing in favour of the CNB not straying from its mandate.

We take this appointment as partially under the influence of Michl, as policy-wise, Zamrazilova doesn't change much. In fact, she will be likely voting for more rate hikes, given her past voting record and her views. Still, we suppose this is part of an attempt to quell down markets and provide a more balance set of appointments.

Jan Frait:?Frait is Zamrazilova's antipode, as he is a clear dove. His voting record at the CNB back in 2000-2006 shows it clearly, as Frait has been consistently supporting lower rates than rate decisions. His selection is in line with Zeman's wish to have people who oppose rate hikes. Furthermore, Frait is currently heading the CNB's financial stability department, so he comes from CNB staff, a tradition that Zeman has followed during his term when making multiple picks. The most recent example is Tomas Holub, who headed the monetary policy department before he joined the board in December 2018.

Frait will be leaning the overall CNB board bias a little more to doveish views, though we don't see him as a radical dove. In fact, he is likely to be somewhat more reasonable than Ales Michl or even Oldrich Dedek, whom Frait knows well. Frait also serves as a balance to the appointment of an outspoken hawk as Zamrazilova.

Karina Kubelkova:?Kubelkova is more difficult to assess, as she hasn't had a reason to speak often on monetary policy. She is currently the chief economist of the Czech Commerce Chamber, and our impressions about her competence are pretty positive. She has also been advising the ODS, the leading ruling party in the current government, and we see the influence of PM Petr Fiala in her appointment, given that Fiala discussed CNB board changes with Zeman recently. Kubelkova could be seen as a counterweight to Michl, who has very strong ties with Andrej Babis, the former PM and currently opposition leader. Still, we do not feel fine with making so many appointments with political ties, regardless which side of the political spectrum they come from.

From the short time we have had to assess Kubelkova's potential policy bias, she appears to be largely neutral, with a slight hawkish lean. Her recent comments regarding monetary policy were in support of tightening, and she argued that elevated inflation was to a great extent due to domestic factors, which has been the argument of the hawkish majority on the current CNB board. Still, we don't have much to judge, though given the other two picks, she is likely to be a lot more balanced than any of them.

Change in CNB board bias

The good news is that the overall bias of the CNB board will not change a lot with these appointments. There will be certainly a shift towards more doveish views, but not an earth-shattering one. We have a table below that illustrates the current policy bias, as well as the bias of incoming board members, or at least those that have a voting record. Our method of calculating the bias is to put +1 to a member's overall rating if they vote more hawkishly than the board did, and -1 if they voted more doveish. You can clearly see how far on the bias spectrum Zamrazilova and Frait are, though arguably, the CNB board used to meet every month when they used to be on the board, rather than 8 months a year, which is why their absolute score is higher. The more important point is that Zamrazilova and Frait have been very consistent in voting, and we expect them to remain so when they rejoin the CNB board:

If we assume that Kubelkova is relatively balanced, her policy position would be along that of Jiri Rusnok or Tomas Nidetzky. Thus, we have in effect the replacement of two relatively balanced members and a hawk with a hawk, a dove and a balanced member, so the shift is clearly towards the doveish side. However, this still doesn't grant Ales Michl a majority, as he can certainly rely on Dedek and Frait to maintain stable rates, but we believe Kubelkova will not be a certain vote. If anything, the new CNB board will be more balanced towards the middle, which will make board meetings a lot more interesting, in our opinion, though the outcome will be probably harder to predict.

Conclusion

In the end, Zeman seems to be trying to mitigate the negative impact he provoked by appointing Ales Michl as the next CNB governor. We believe markets will not react negatively to the appointments, even though questions remain why some people need to go, like Benda, for instance. Nevertheless, we have no reason to doubt the integrity of the new board members, and we consider them a lot more fitting for the CNB board than Michl ever has been. This also gives some hope that when the next round of appointments comes next February, Zeman will follow the same path and will not make big changes. In fact, it increases the odds of Mora staying at the CNB board and having a doveish member appointed to replace Dedek. Naturally, Zeman could easily proves us wrong, but it seems he is aiming for a balance, which we don't believe many will object to.