Europe's Top Hawks to Hike Rates Despite Global Dovish Turn

(Bloomberg) -- Europe’s most hawkish central bank is preparing to raise borrowing costs again, defying a global economic slowdown that’s made most of its peers more cautious.

Czech policy makers have held interest rates unchanged for the past three meetings as external risks including Brexit, trade wars, and weakening demand from neighboring Germany overshadowed domestic inflationary pressures. But with worst-case scenarios failing to materialize, most analysts expect the central bank to lift its benchmark a quarter point on Thursday to 2 percent, adding to an unprecedented five hikes last year, the most in Europe.

Europe's Top Hawks to Hike Rates Despite Global Dovish Turn

Faster-than-expected inflation, a weak koruna and still-robust economic growth offer enough room for a rate increase, according to Raiffeisenbank AS analyst Eliska Jelinkova.

“The rhetoric of the board members, including the traditional doves, is tilting in favor of a hike,” she said.

The Czechs stand out as they go against a pullback from tighter monetary policy by central banks around the globe, including the U.S. Federal Reserve and the European Central Bank. Wage growth helped pushed inflation to the highest since 2012, well above the 2 percent target. By contrast, Hungary’s central bank is expected to hold tight after announcing a cautious mix of tightening measures in March.

Board member Tomas Holub said in an interview this month that he preferred a hike in the first half of the year. Vice Governor Marek Mora told Reuters he was ready to back an increase if it’s supported by fresh staff forecasts.

Latest comments by policy makers:

  • Marek Mora: Ready to back hike if forecast supports it 
  • Vojtech Benda: Room for higher rates still exists
  • Jiri Rusnok: ‘Thin Line’ between rate hike or standing pat
  • Tomas Holub: Brexit delay gives brief window for hike
  • Oldrich Dedek: External risks remain reason for caution

Still, forward-rate agreements, which are used to hedge against future changes of borrowing costs, show money-market investors remain split between those expecting the central bank to act on Thursday and those betting on a hold.

By contrast, a Bloomberg survey shows only three out of 19 economists expect the benchmark to stay at 1.75 percent this week, with the rest predicting an increase to 2 percent.

“Holub, who has very probably already seen the new forecast, is trying to direct the market in the correct direction towards a May hike,” Societe Generale SA economists Viktor Zeisel and Jaroslaw Janecki wrote in a report. “Also, Vice Governor Mora sounded more hawkish than usual.”

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