The Czech National Bank’s move Thursday to raise its key two week repo rates by 0.25 percentage points to 0.5 percent was hardly a surprise and the Czech crown strengthened little as a result. Previous evidence had shown that central bank members had already been on the verge of raising rates at the previous session.
And some Czech economists were saying even before the move that a bigger jump in rates, by half a percentage point, could have been called for given the buoyant and bubbling state of the local economy.
But for the Czech bank, anticipation appears to be the greater part of pleasure, and further rate rises can now be expected before the end of this year and likely at the start of 2018. In fact, central bank governor Jiří Rusnok said that there was no technical reason why rates could now be increased at successive meetings of the bank board.
Such expectations are being fuelled by the fact that inflation is well above the bank’s 2.0 percent target figure. It came in at 2.7 year-on-year in September but is seen by most analysts as likely to fall to around 2.2 percent and ease to the target 2.0 percent rate within three years.
And the central bank does not appear excessively concerned that the Czech crown will appreciate too much along with the boost from rate rises. Further strengthening of the crown is expected but the increases so far are seen as being in line with the bank’s expectations.
Many Czech economists are talking about the local economy as becoming overheated and from Thursday’s press conference that view is clearly shared by central bank governor Rusnok as well. The clearest signs of that heating are high wage increases and the sharp rise in property prices in Prague and other big cities.
But there are also factors giving rise to caution for the rate rise hawks. One of those factors is that the European Central Bank appears committed to its low rate expansionary interest rate and monetary policy for at least another year. And the Czech central bank can only with difficulty really out of step with what’s happening in the rest of the euro zone if the domestic circumstances are clearly exceptionally different. That’s one argument though that Jiří Rusnok has been pushing when taking a broad overview of the Eurozone as a whole and the fundamentals of the Czech domestic economy.
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