By Krystof Chamonikolas (Bloomberg 24. 10. 2017)
Czech policy makers have a strong enough case to raise interest rates at their meeting next week as domestic inflation pressures are building faster than expected, central bank board member Marek Mora said.
Wage growth, consumption and investment activity have exceeded the Czech National Bank’s forecasts since August, when the monetary authority delivered Europe’s first rate hike in 2017 and signaled a yearlong pause in tightening, Mora said in an interview on Monday. He and two other central bankers sought another increase at the last policy meeting on Sept. 27, but the seven-member panel voted by a thin majority to keep the key rate at 0.25 percent.
“There is certainly room for a 25 basis-point increase in November,” he said. “A range of domestic economic data have been published since our last forecast was compiled, and most of them point in an inflationary direction.”
Mora’s comments echo those of the central bank’s main forecaster Tomas Holub, who said last week the economy needed higher rates. Czech price growth is outpacing that of most other European Union nations, hovering above the central bank’s 2 percent target as workers emboldened by the bloc’s lowest unemployment demand higher pay.
Forward-rate agreements fixing interest costs a month from now show most investors pricing in an increase in the benchmark to 0.5 percent on Nov. 2, when policy makers will assess fresh staff forecasts. The prospects of Czechs tightening before the euro area, the Czech Republic’s main trading partner, has damped demand for the government’s bonds and widened the yield spread over German bunds.
The koruna’s 5.4 percent gain since April, when rate setters scrapped a lid on appreciation imposed in 2013, is trailing the monetary authority’s assumptions because of oversized bets on the currency held by foreign investors, according to Mora. He said the central bank should raise rates gradually, assessing the impact on the exchange rate after every 25 basis-point increase to avoid the risk of the koruna gaining too much.
“The Czech economy needs tighter monetary conditions,” said Mora. “I would personally like to see tightening that’s equally spread between koruna appreciation and rate hikes, so that we create more room to manoeuvre with monetary policy in the future and avoid putting too much strain on exporters. This would also be better for financial stability.”