Česká národní banka

Czech rate hike vote may come in September or November

By Jason Hovet and Robert Muller (Reuters 13. 9. 2017)

The Czech central bank could raise interest rates again in September or November with economic and wage growth outpacing expectations, board member Vojtech Benda said.

The Czech National Bank (CNB) jumped ahead of others in the European Union in August when it delivered the bloc's first rate hike since 2012, with the sole exception of a move by Denmark in January 2016 to maintain its currency peg against the euro.

The economy expanded a record 2.5 percent on a quarterly basis in the second quarter, and wages posted their fastest gains in a decade.

While recent data have pointed to upside inflation risks, Benda said a pickup in investments should lead to productivity growth that will curb price pressures in the coming quarters and years.

"The current development shows... we have scope for further tightening of monetary policy in the coming quarters and even in the coming months," he told Reuters on Tuesday.

"I can imagine myself voting for a rate hike in September or in November," he said.

The bank raised its main two-week repo rate to 0.25 percent on Aug. 3, lifting rates from near zero faster than most expected when the bank abandoned a cap on the crown's exchange rate that it had held in place since 2013.

The bank next meets on Sept. 27, and then on Nov. 2 when it will have updated macroeconomic forecasts.

Benda said he expected debate on a further interest rate increase at both meetings and that he was open on the timing of such a move.

"On the one hand, we can say 'Why postpone something which seems is more or less inevitable?' On the other hand, I think that it is a tradition in the central bank that most of the changes of monetary policy instruments are usually dated to the debate of the updated forecast."

Developing well

Benda said he would like to see interest rates increase "at least by 25 basis points before the end of this year and a further increase in the coming quarters during 2018".

Other board members have hinted at the need for a rate hike again, despite the latest staff forecasts showing a policy move likely only next year.

Vice-Governor Mojmir Hampl told Reuters last month that he would not rule out voting for a rate hike in September. Governor Jiri Rusnok has said he would prefer to wait until new forecasts are ready in November.

The bank might also take into account the European Central Bank, which has yet to clearly communicate the end of its stimulus.

But Benda said monetary policy needed to reflect the needs of the domestic economy. He said the only thing that might change his view would be some unexpected strong crown appreciation or volatility.

The crown has been surprisingly stable since the bank released it from its cap of around 27 to the euro in April.

It has gained 3.4 percent and trades around 26 to the euro now, with no momentum to move beyond that level for the moment, largely due to the market's overbought position after billions of euros flowed in before the cap exit.

Benda said he was satisfied with developments since the crown cap was scrapped. "The possible downside risks to inflation did not materialise and the situation turned, in fact, into a more comfortable position for us that allows us to really normalise monetary policy."

Year-on-year economic growth reached 4.7 percent in the second quarter, well above expectations and putting the economy on course to expand around 4 percent this year, analysts say.

Benda said private consumption remained the main economic driver and foreign demand was developing well, with no signs of decelerating in the near term.

"This is the second leg of growth, which should stabilise the Czech economy's overall performance in the coming quarters."