Czechs get interest rate hikes in early to brake booming economy

Чешский национальный банк, Фото: ŠJů, CC BY 4.0

The Czech central bank has taken a first step in raising interest rates with the big question now how fast the follow up hikes will follow.

Czech National Bank, photo: ŠJů, CC BY 4.0
A return to normal or normalisation - a more problematic word in the Czech context - could describe the Czech National Bank’s move for the first time in around a decade to raise interest rates from almost zero levels.

The move itself, a hike of 0.20 percentage points, is less significant in itself than as a pointer or signpost of how the central bank currently evaluates the pro’s and con’s of such a step and what the likely follow up moves will be.

One point to underline perhaps, central bank governor Jiří Rusnok, stressed after Thursday’s decision that six members of the bank board had voted for the rate hike. Before the meeting, the spotlight was put on two factors that might have persuaded those board members to hold off from the rate rise: the fact that the rate rise would put it out of step with the Eurozone and could accelerate too fast already appreciating Czech crown exchange rate. Governor Rusnok gave a detailed explanation where the current Czech and euro zone situations diverged:


Jiří Rusnok, photo: Filip Jandourek
"We kept in mind the fact that the euro zone is currently continuing in its policy of massive monetary easing. But there were plenty of domestic reasons why we should untie ourselves from our current zero interest rates and begin the, hopefully gradual, process of returning conditions to normal not just by the strengthening of the crown, which we expected and counted on, but also through higher interest rates.ʺ

And the governor gave further examples of where on inflation, wage rises, and the overall labour market the Czech Republic stands out from many countries in Western Europe.

ʺHere, in contrast with the euro zone, there is a very real and very visible and robust increase in wages. Our wages are sometimes rising on average by five or six percent. But attention, the Czech Republic now also has an historically high record of employment, participation, at the level of around 75 percent. That’s a level that we looked on in wonderment 10 to 15 years ago when it applied to a handful of Scandinavian and several other smaller EU countries. So the level of wages growth is even higher, perhaps this year at the level of 7 to 8 percent. That’s a massive increase in money which is flowing into demand and demand is the driver which is pushing the Czech economy on."

Photo: Barbora Němcová
For good measure here, Jiří Rusnok threw in a new central bank forecast upping its expectations for growth this year to 3.6 percent and see that momentum continuing for the following two years at just over 3.0 percent.

One question was answered in the immediate aftermath of the rate rise, the crown did indeed strengthen to below 25.90 crowns to the euro, its highest level since the low crown regime ended in April, but then rebounded to more or less where it was hovering before. So worries about an excessive rise don’t seem founded.

But the big remaining question is how fast and how the successive interest hikes will come. The governor was not surprisingly vague on that one but some analysts are betting at least another quarter percent hike before the end of the year and another half percentage point during the start of 2018.