Czechs Keep Hawkish Tone as Global Risks Stop Rate Hikes For Now

(Bloomberg) -- Czech central bankers signaled their desire to continue raising borrowing costs is still alive, even as risks from the global slowdown have, for now, held them back.

The bank kept its benchmark interest rate at 2% on Wednesday for a third consecutive meeting following a string of eight hikes that raised the rate to a 10-year high. Two board members sought a quarter-point increase but were outvoted by the remaining five.

“It wasn’t an easy debate,” Governor Jiri Rusnok told reporters after the meeting. “It certainly wasn’t a debate about whether to cut. Rather, it was a very balanced debate on whether to slightly increase or hold rates.”

The koruna gained 0.2% to the euro, hitting a two-week high and outperforming its central European peers.

As the economic expansion slows around the world and central bankers in the U.S. and the euro area respond with fresh stimulus, their Czech counterparts are facing conflicting domestic and foreign factors.

Strong consumer spending, rising housing costs and a weak koruna exchange rate are keeping inflation well above target, but key manufacturing industries are already feeling the weakness abroad.

The proposal to raise rates may have been justified in light of domestic price pressures, according to Rusnok, who said the bank will return to discussing a potential hike again at the next meeting in November. It will then also review the new economic forecasts.

The board sees “rather substantial” risks to its inflation forecast in both directions, and assessed them as slightly inflationary overall.

The weaker-than-forecast koruna is the main inflationary risk. The debate on Wednesday showed that concerns about a more-pronounced slowdown abroad prevailed over worries that domestic inflation may become “less controlled,” Rusnok said.

The recent dovish turn by the U.S. Federal Reserve and the European Central Bank has sparked expectations among some investors that the Czechs will follow suit soon. But such bets were completely erased following Rusnok’s comments.

“I personally think the central bank will not raise rates in the foreseeable future,” said Radomir Jac, chief economist at Generali Investments CEE. “Although, the message regarding the direction of the debate about a potential rate increase was very clear.”

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, Andrew Langley

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