Česká národní banka


Faster Czech Rate Increases Tempt Hampl as Economy Revs Up

By Kryštof Chamonikolas (Bloomberg 13. 12. 2017)

The Czech economy is showing signs of overheating and could require faster interest-rate increases than outlined in the central bank’s forecasts, according to Vice Governor Mojmir Hampl.

While recent data were in line with the Czech National Bank’s projections, strong private consumption -- fueled by rapid wage growth -- could intensify upward pressure on consumer prices, Hampl said in an interview Tuesday. That would support the central bank’s “sensitivity scenario,” which implies about six rate hikes of 25 basis points each by the end of 2018, starting this month, he said. By contrast, the baseline forecast signals no change in December and up to two increases next year.

The only central bank in Europe to raise borrowing costs twice this year plans more tightening to cool one of the continent’s fastest-growing economies as inflation remains above its 2 percent target. While most analysts surveyed by Bloomberg expect the benchmark rate to stay unchanged at 0.5 percent on Dec. 21, Hampl said his deliberations focus on the question whether the economy is running in line with its potential or if “the engine is revving up at a speed it’s not designed for.”p> “The dilemma is not easy for me to resolve, but I’m rather leaning toward the view that there may be additional inflationary pressures that have yet to fully unfold,” Hampl said. “In terms of consumption, the economy is firing on all cylinders, which keeps directing me toward the alternative model of a higher inflation trajectory and faster rate increases.”

After scrapping a cap on the Czech currency’s gains in April, policy makers are relying on a mix of exchange-rate appreciation and rate hikes to keep price growth in check. The koruna is the world’s best-performing major currency this year, but it has held little changed since the last increase in borrowing costs on Nov. 2. That’s because koruna holdings, amassed by foreign investors mostly before the end of the intervention regime, are effectively slowing its strengthening.

The Czech currency weakened 0.1 percent to 25.662 against the euro as of 11:35 a.m. in Prague, paring its 2017 rally to 5.3 percent. The country’s bonds fell, lifting the yield on five-year government securities by seven basis points, the most in a month, to 0.82 percent.

The koruna’s developments will continue to play a role in determining the timing and the extent of increases in borrowing costs as the widening gap between Czech and euro-area interest rates may at some point attract more capital inflows and tighten monetary conditions via stronger exchange rate, according to Hampl.

“The overbought position has forced investors to change their expectations for how quickly they will be able to exit and on what terms,” he said. “We are still in a relatively comfortable situation in that the limited koruna appreciation is giving us more freedom to use interest rates.”