ČNB surprise rate hike lifts Czech crown to over 7-year high

The Czech National Bank (ČNB) surprised the market by raising interest rates by 25 basis points at its rate-setting meeting on Thursday, a possible last move in a tightening cycle to rein in domestic prices pressures as economic growth slows, analysts say.

ČNB, photo: Filip Jandourek, Czech Radio

“We looked for a hike in May, but the move came earlier than expected. [Thursday’s] hike is likely to end the ČNB tightening cycle. The dilemma now shifts towards whether to stay on hold or cut in the second half of 2020. On the margin, we favour the former,” ING Bank wrote.

The ČNB board decided to raise interest rates by a narrow majority of 4:3. It was their first hike since May and the ninth increase in two-and-a-half years. No analysts in polls by the news agencies Reuters or Bloomberg had forecast the move.

Bloomberg reported that the hike sent the Czech currency appreciating as much as 0.8 percent to 24.877 per euro, the strongest level since October 2012. But the exchange rate gave back most of those gains after ČNB governor Jiří Rusnok said ratesetters may discuss potential policy easing in the second half of 2020.

Jakub Seidler, Archive of Charles University

“For some board members, concerns about higher inflation and loss of ČNB credibility prevailed over fears of a slowing domestic economy and other foreign risks,” wrote ING Bank chief economist Jakub Seidler and chief EMEA FX and IR strategist Petr Krpata.

Rate-setters voted against calls for a rate hike at the previous three meetings although the ČNB’s outlook, confirmed in an update on Thursday, had implied rates could rise before falling again later in 2020.

Inflation in the new ČNB forecast has been revised up. The central bank expects average inflation of 3.2 percent this year, compared to 2.7 percent in the previous forecast. In March, the CNB expects inflation at 3.6 percent year on year.

The Czech central bank has been steadily lifting its key rate since August 2017, when it was at a low of 0.05 percent, while much of Europe and the eurozone has either maintained or expanded a loose monetary policy stance.

ČNB governor Jiří Rusnok told a news conference the central bank board do not expect that inflation pressures will escalate further in such a way as to trigger by a further rate increase.

However, inflation is also higher over the monetary policy horizon (1H21), which for some board members could also be an argument to back a hike, ING Bank wrote.