Czechs Signal No Rush to Raise Rates Much More After Second Hike

(Bloomberg) -- The Czech central bank delivered its second interest-rate hike of 2018, but its message that it won’t be in a hurry to further raise borrowing costs in one of Europe’s best-performing economies drove the koruna to a two-week low.

The bank increased the benchmark rate to 0.5 percent from 0.25 percent on Thursday, the second bump since August and in line with the forecasts from 22 out of 23 economists surveyed by Bloomberg. It also raised its forecasts for next year’s inflation, prompting the board to debate whether the economic situation warranted a bigger increase than the one approved.

“The prevailing view, and there was a unanimous vote in that respect, was that there’s no reason for dramatic steps, and that we have enough time and room to raise rates in future meetings,” Governor Jiri Rusnok told a news conference after the decision.

While they’re the European Union’s first central bank to conduct two rate hikes this year -- including the continent’s first in August -- Czech policy makers are switching to a more cautious approach to reining in inflation. Still, with surging wages driving price growth above their target, rate setters’ efforts to cool the economy have run counter to those of their central European peers. Poland looks set to keep borrowing costs unchanged at least through 2018 and Hungary’s central bank has expanded its unconventional monetary-easing program.

The koruna rebounded from 0.7 percent weaker against the euro to trade half a percent down at 5:15 p.m. in Prague. Traders cited the monetary policy council’s comments and the new forecast showing less urgency to tighten monetary policy than some board members indicated before the meeting. The currency’s move resembled the reaction to the Bank of England’s rate increase earlier on Thursday, which sent the pound tumbling against the dollar after the BOE signaled another hike isn’t imminent.

“The statement accompanying the Czech MPC’s meeting was more dovish than we had anticipated,” said Liam Carson, an analyst at Capital Economics in London. “Accordingly, we think that the Council will hold fire at December’s meeting and wait until next year before the next rate hike.”

The decision by the European Central Bank last week to extend asset purchases at reduced amounts until at least next September will slow Czech policy tightening by mid-2018, Rusnok said. The ECB’s approach may preserve demand for the higher-yielding koruna for longer, effectively tightening monetary conditions and in turn reducing the need for rate hikes. The Czech National Bank governor said the koruna remained overbought but “very close” to the level of the central bank’s assumptions.

The central bank raised its 2018 outlook for the Prague interbank interest rate, or Pribor, which serves as a proxy for official rates, to 0.9 percent, from 0.7 percent. That implied one or two rate increases next year, according to Jiri Polansky, an analyst at the Czech unit of Erste Group Bank AG.

The bank board mentioned the possibility of slower-than-expected koruna appreciation among upside inflation risks, and the exchange rate will play a role in the timing of the future rate increases. The central bank’s forecast doesn’t reveal how it expects the koruna to develop, and a lack of currency gains would increase the scope for policy tightening via interest rates.

“It’s apparent that the CNB is aware of the widening gap between its own monetary policy and the monetary conditions in the euro zone,” said Radomir Jac, the chief economist at Generali Investments CEE. “As much as the development and the outlook for the Czech economy is speaking in favor of further increases in CNB rates, the bank board will probably continue to proceed cautiously.”

--With assistance from Andre Tartar and Radoslav Tomek

To contact the reporters on this story: Peter Laca in Prague at placa@bloomberg.net, Krystof Chamonikolas in Prague at kchamonikola@bloomberg.net.

To contact the editors responsible for this story: Balazs Penz at bpenz@bloomberg.net, Michael Winfrey, Paul Abelsky

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