Czech central bank sees another rate rise amid strengthening crown

One rate rise down, probably one still to go this year. That is how Czech central bank governor Jiří Rusnok summed up the situation after the bank board took the largely expected decision to raise the key interest rate by 0.25 percentage points to 0.75 percent.

Jiří Rusnok, photo: Filip Jandourek

It’s the third interest rate in a row since the so-called low crown policy was jettisoned last year and the crown allowed to float against the euro. The Czech National Bank is sticking its neck out a bit compared to other European banks with its series of rate rises. Rusnok argues that high growth, strong wage rises, and above target inflation justifies the steps so far.

The move was largely expected and, according to Rusnok, was unanimous though there was, he said, some hesitation whether the move might not be delayed a bit.

He added that there had been no talk of increasing rates by a bigger margin. A quarter percentage point is seen as a fairly standard step for what are traditionally cautious and conservative institutions.

Rusnok admitted that another rate rise should come this year but he was not keen to elaborate on the timing and whether it’s likely to come towards the end of the year. Inevitably, the central bank will be keeping a key eye on how much the Czech crown strengthens in anticipation of the next hike.

So far, Rusnok says the fairly strong gains by the crown have not taken the bank by surprise but it expects these to slow down in the near future. The bank published its own expectations of how the crown will fare over the next year, the first time it has taken such a step in four years. These, it cautioned, should be taken as guidance and are not written in stone.

The central bank counts on an average level for 2018 of 24.90 crowns to the euro. That should strengthen moderately to 24.5 crowns to the euro in 2019. The crown on Thursday appreciated to its strongest level in five years at around 25.18 crowns to the euro.

Photo: Štěpánka Budková

Bank governor Rusnok also addressed the question of the large speculative investment positions that have been taken in the Czech crown on the very correct expectation that it will strengthen further and pay off for those who are stocking it up. The central bank has been worried of significant crown fluctuations if these positions began to be unwound quickly.

Here, Rusnok offered some assurance that the bank’s worries on this point have eased. The feeling, he says, is that some of these investments which might last year have been short-term and liable to cause volatility have now morphed into longer term positions which are liable to unwind more slowly and with less disruption.

The other takeaways from the board meeting were a new set of updated economic predictions. These see consumer inflation averaging slightly lower this year at 1.8 percent instead of the previous prediction of 2.0 percent. The central bank’s target rate is 2.0 percent.

Economic growth is seen slightly higher at 3.6 percent this year instead of the previous figure of 3.4 percent. And growth for 2019 is nudged a little higher as well to 3.2 percent from 3.1 percent.