World's Best Currency Still Too Good to Rush Czech Rate Hike
Czech Rate Hikes Seen Interrupted as Slower Inflation Buys Time
(Bloomberg) -- The world’s best-performing currency wobbled a bit, but it wasn’t enough to persuade the Czech central bank to bring forward increases in borrowing costs.
Despite the koruna’s depreciation to a two-month low on Thursday, five of seven members of the policy board voted to hold the benchmark interest rate at 0.5 percent. Two sought an increase to 0.75 percent. Analysts were similarly split, with 16 of 23 forecasts in a Bloomberg survey seeing no change.
Europe’s first central bank to raise borrowing costs this year is relying on a mix of exchange-rate appreciation and policy tightening to cool price growth in one of the continent’s fastest-growing economies. But last month’s slowdown in inflation means the Czech National Bank now has time to wait with further rate hikes until at least the next meeting on Feb. 1, when it will debate fresh staff forecasts, Governor Jiri Rusnok told reporters after the rate decision.
While the koruna has weakened 0.6 percent to the euro since the last rate increase on Nov. 2, its average exchange rate remains “slightly” stronger than the monetary authority had assumed, he said.
“The economy has been developing very much in line with our forecast, and the forecast says there’s no pressing need to react immediately,” Rusnok said in Prague. “The moderate koruna weakening since our last meeting is still within a corridor compatible with our assumptions. That was another argument why we don’t need to rush interest-rate increases.”
The koruna has appreciated about 5 percent since the central bank scrapped its 27-per-euro cap on its gains in April, the biggest currency rally globally in the period. But its further advance is limited by oversized holdings amassed by foreign investors mostly before the end of the intervention regime.
The currency retreated after the rate announcement and traded little changed at 25.72 per euro as of 10:21 a.m. in Prague on Friday.
Rusnok’s comments on Thursday contrasted with the view of Vice Governor Mojmir Hampl, who signaled last week he might vote for a December hike because the economy was beginning to overheat, mainly in private consumption. A shortage of workers is fueling rapid wage growth, keeping inflation above the 2 percent target.
“In the end, a traditionally more cautious attitude toward monetary-policy tightening prevailed,” said Jakub Seidler, chief economist at the Czech unit of ING Groep NV. “The CNB will gradually carry out further rate increases next year, with the first hike very likely at the beginning of February.”
--With assistance from Andre Tartar
To contact the reporter on this story: Krystof Chamonikolas in Prague at kchamonikola@bloomberg.net.
To contact the editors responsible for this story: Celeste Perri at cperri@bloomberg.net, Paul Abelsky, Andrew Langley
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