By Jan Lopatka (Reuters 24. 10. 2017)
The Czech central bank may consider a 50 basis-point interest rate hike when it meets on Nov 2 as the fast-growing economy is able to absorb a larger increase with rates still near zero, central bank board member Tomas Nidetzky said.
Nidetzky voted with three other of the board's seven members against a 25 basis-point hike in September, keeping the main repo rate at 0.25 percent in the wake of the bank's August vote to lift rates off zero after almost five years.
But he told Reuters the decision was motivated solely by a desire to wait for a new quarterly inflation forecast and for the European Central Bank to announce its next policy steps, which it is expected to do on Oct. 26.
The Czech bank my be bolder in November with new forecasts in hand, and then pause again in December, he said.
"I do not think that the economy would not absorb a 0.5 percentage point increase in rates because the key interest rate, being at 0.25 percent today, is closer to zero than to anything else," Nidetzky said.
Hiking by 50 points may be a signal that the bank may shift to less frequent hikes rather than a need to step on the brakes.
"With such a low base we are coming from, we can afford that without wanting to send a signal the economy is somehow significantly overheating," he said.
"It should rather indicate that further increases will play out rather in lower frequency, that the next growth in rates will happen later than immediately at the following meeting."
He said there were two approaches to rate increases ahead, providing economic development allows for it, one being to debate possible 25 basis-point tightening at every six-weekly meeting.
"Or I can imagine that rate increases will initially be more pronounced, but there will be larger intervals between individual decisions and thus more room for data analysis."
HOCKEY STICK OUTLOOK
Next year, the bank may continue moving towards, but not necessarily achieving, standard policy settings, Nidetzky said, meaning nominal rates around 2.5-3.0 percent given the bank's inflation target at 2 percent.
Nidetzky said the new forecast could turn to a more "hockey stick" - ie with a steeper rise in rates ahead - kind of outlook, such as the one seen in the bank's February forecast, the last before a three-year cap on the crown was scrapped in April.
That saw an average 2018 repo rate at 0.88 percent versus the latest August forecast which sees it at 0.49 percent.
Nidetzky's comments bring him partly into line with fellow board member Vojtech Benda, who voted for a hike in September and has since said the economy could use another 50-75 basis point increase by the year's end.
The bank's main conundrum to solve when returning to a more standard rate level is the exchange rate, which has risen 5.2 percent against the euro since the cap was dropped.
The August hike did not prompt any big currency firming, but the currency started appreciating after the September meeting, where three of seven on the board favoured tightening policy.
One drag on the crown has been the large long-crown positions built by investors before the April float.
More hikes will widen the interest rate differential, which could replace part of the policy tightening done by interest rates.
Nidetzky said the crown has not firmed enough to prevent more hikes.
"So far it has not been anything dramatic and it still is within a bound where in my opinion it allows us return to standard policy," he said. "That means going along the path of raising interest rates."
"The crown's exchange rate has not done the work."