Rusnok: Interest rates could go up before the end of 2018

The Czech National Bank could raise its interest rates twice by the end of the year, said the bank’s governor, Jiří Rusnok, in an interview with Reuters. The bank’s council raised the basic interest rate by a quarter of a percentage point to 1.25 percent in August. Mr. Rusnok stated that a further increase could come as early as this month.

Photo: Matěj Skalický, ČRo

According to Reuters, investors believe there is a 70 percent likelihood that the central bank will decide to raise interest rates when its council members meet on the 26th of September. The latest data on economic growth, inflation and wage development supports this prediction.

Year-on-year growth of consumer prices in the Czech Republic sped up in August, reaching 2.5 percent, as opposed to 2.3 percent in June. Inflation was therefore significantly over the the Czech National Bank’s two percent target. This gives the bank increased leeway to raise interest rates.

The bank also published new prognoses. These include a prediction that the crown’s value will be lower than previously thought. According to Reuters, this signalled the need to raise interest rates in order to compensate for the weaker crown.

The rise in interest rates means more expensive mortgages for households and an increase in the cost of loans that businesses use to finance investments.

JIří Rusnok, photo: Filip Jandourek, ČRo

According to CTK, Mr. Rusnok says that the bank’s adjustments to the nominal interest rates are intended to bring interest back to the normal level of “around 2.5 percent, perhaps as far as three percent”, in order to make real interest rates settle around one to 1.5 percent. At a meeting with business owners in Olomouc on Wednesday, Mr. Rusnok said that “this is the direction we are going in”. Mr. Rusnok told CTK that he believes the situation now offers a strong opportunity for interest rate growth. In March, the Czech National Bank’s governor said that the country’s economy had surpassed its predicted growth potential, a fact particularly evident on the job market. The other parameters of the Czech economy are stable according to Mr. Rusnok and do not point to any larger imbalances.

“The Czech economy is evidently close to the top of its economic cycle. We are experiencing very dynamic growth, despite this year’s relative slowdown compared to 2017, but that is more a symptom of cooling an overheated economy. The current economy is still in phase of growth and there is no reason to continue to artificially support it through expansive monetary policy”, Rusnok told CTK.

According to Mr. Rusnok, the Czech National Bank will gradually decrease the expansive monetary policy and switch to a neutral mode. He further added that the Czech National Bank’s monetary policy will not be restrictive either, as it would slow down economic growth.