Czech Republic: Central Bank delivers back-to-back rate hike in August
August 2, 2018
At its 2 August meeting, the Bank Board of the Czech National Bank (CNB) unanimously decided to raise the two-week repo rate by 25 basis points to 1.25%, a move widely expected by market analysts. At the same time, the CNB increased the Lombard rate by 25 basis points to 2.25% and the discount rate by 20 basis points to 0.25%. The decision follows the 25 basis-point hike of the policy rate, to 1.00%, at the previous meeting in June.
The Bank’s decision was motivated by a weakening koruna and rising inflationary pressures. In recent months, the exchange rate has been trending weaker than expected due to capital flight from emerging markets amid a strengthening U.S. dollar and rising yields. Such “deviation in the path of the koruna exchange rate” left room for the Bank to tighten policy to combat a pick-up in inflation, which, on average, exceeded the 2% target throughout Q2 as a result of rising food, fuel and electricity prices, as well as robust wage growth amid an exceedingly tight labor market. All in all, a weaker-than-expected koruna and a pro-inflationary environment underpinned the Board’s decision.
Revised forecasts for GDP growth, inflation and the exchange rate were also released alongside the Bank’s statement. In particular, it projected a higher inflation path compared to its May forecast. It now sees inflation remaining above the 2% target through mid-2019 and expects that downward pressures on the Czech crown will persist for the remainder of the year—pointing to further policy tightening in the near-term. The communiqué had a hawkish tone, with the Bank noting that “consistent with the forecast is a continued rise in interest rates towards their long-run neutral level”. The Bank’s hawkish stance going forward was reaffirmed at the press conference, with Governor Rusnok responding that it “can’t be ruled out that the next step will follow relatively very soon” when asked about future rate hikes.
Our panelists on average are expecting such a scenario, and some of them even think the CNB could deliver two rate increases by the end of the year. As Jakub Seidler, Chief Economist for the Czech Republic at ING, highlighted: “Given the current favorable economic conditions, pro-inflationary risks stemming from an overheated labor market, a still relatively weak Czech koruna and recent CNB forecast indicating the need for further monetary tightening, we believe that one more rate hike this year is a done deal. If the koruna’s appreciation remains muted, we could even see two hikes by the end of the year.”
The next monetary policy meeting is scheduled for 26 September.
Author: Javier Colato, Economist