Hawkish Signals Revive Market Bets on Czech Interest-Rate Hikes
Hawkish Signals Revive Market Bets on Czech Interest-Rate Hikes
(Bloomberg) --
Investors are beginning to bet on another Czech rate increase, taking a cue from the central bank’s hawkish tone after policy makers held fire this month.
Rate setters again debated whether to raise borrowing costs on Thursday as Czech inflation keeps running above their target and fresh forecasts from the monetary authority show an increased need for tightening. The majority of the board in the end chose a wait-and-see stance to better assess the impact of the global economic slowdown, overruling two dissenters who sought an immediate hike.
The outcome of the meeting was a “hawkish hold,” according to Goldman Sachs Group Inc. analyst Kevin Daly.
“It is clear that the risks to Czech rates are skewed toward higher rates in the near term,” Daly said in a report, adding that Goldman is maintaining its outlook for the rates to remain stable through the end of next year.
After raising borrowing costs eight times since 2017, Czech policy makers keep discussing potential further tightening even as central banks in the U.S. and the euro area are coming up with fresh stimulus. While the export-oriented manufacturing industry in the ex-communist nation is beginning to feel the weakness abroad, record-low unemployment and rapid wage growth are boosting domestic consumption and prices.
The koruna has held stable since the rate meeting on Thursday, keeping its 1% percent gain versus the euro since the start of the quarter. Details of the central bank’s forecast published earlier on Friday showed the monetary authority doesn’t expect more appreciation by the end of this year.
The Czech central bank has been applying a more flexible approach to interest rates than some its central European peers. Neighboring Poland hasn’t changed the benchmark since 2015, a period during which the country has witnessed months of deflation as well as accelerating inflation.
Money markets are now pricing in a roughly 50% probability of a Czech hike in the next six months, and ING Groep NV says this would most likely happen in February. Investors were positioned for no policy change two days ago and bet solidly on rate cuts in August and early September.
“Assuming that the CNB will follow global central banks in easing has been unjustified,” ING strategists Petr Krpata and Jakub Seidler said in a report, recommending investors bet on further increase in Czech market rates. “Hike(s) are back on the cards.”
--With assistance from Irina Vilcu.
To contact the reporter on this story: Krystof Chamonikolas in Prague at kchamonikola@bloomberg.net
To contact the editors responsible for this story: Blaise Robinson at brobinson58@bloomberg.net, Peter Laca, Balazs Penz
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