Czech interest rates should stay stable for now as there are signs inflation which has hit a three-decade high is starting to slow and may peak at a lower level than forecast, central bank Vice-Governor Eva Zamrazilova told Reuters.

Zamrazilova is one of three new faces on the Czech National Bank's seven-member board that last month left policy unchanged after more than a year of sharp interest rate hikes.

She said in an interview conducted on Monday that she was likely to vote again for stable rates at the central bank's Sept. 29 meeting, adding: "So far, it looks like rate stability is probable."

Looking ahead, a rate hike would still be an option if wage growth picks up too much, she said, while a cut could be only considered if inflation was clearly heading back to target.

The central bank kept its main interest rate unchanged at 7.00% in August, after hiking by a total 675 basis points since June 2021. It was the revamped board's first meeting under new Governor Ales Michl, who had opposed policy tightening as a board member.

Zamrazilova said that decision was vindicated by data on Monday showing inflation slowed in August for the first time in over a year, to a headline rate of 17.2%.

"The peak can be lower than we expected, but it is also possible that inflation will slow at slower pace," she said.

The data prompted a drop in market interest rates, with the first bets appearing on an interest rate cut early next year.

Zamrazilova said inflation expectations would have to be anchored to the 2% target before she would consider a cut.

She also said that the bank's mandate to intervene against swings in the crown could still be used once rate cuts start.

"We are at war, it's possible that the crown will be under a pressure of negative news again, and we might have to launch the interventions again," she said.

 

WAGE CONCERNS

Soaring inflation this year, made worse by surging energy costs following Russia's invasion of Ukraine, has started hitting the Czech and other central European economies as purchasing power erodes and consumer demand sinks.

"Retail sales are declining because people are afraid that they won't be able to pay their electricity bills, they are rather saving," Zamrazilova said.

Czech real wages fell almost 10% in the second quarter, while nominally they grew 4.4%, subdued compared to previously.

Governor Michl has said it is important to protect against a wage-inflation spiral, along with cutting the pace of state debt growth and keeping rates high enough to push inflation down.

Zamrazilova said nominal wage growth above 5% or 6% would signal a rate hike was needed.

"I would vote for a rate hike then. (However), I don't see that so far, he said.

(Reporting by Robert Muller; Editing by Catherine Evans)