Page 13 - bne_Magazine_September_2017

bne September 2017 Companies & Markets I 13
Czech rate setters take the plunge
bne IntelliNews
T
nomic recovery gathers some steam.
Too soon? The move has been the subject of no little debate in recent weeks, as the CNB is clearly concerned by the progress of core inflation above its 2% target. There are signs that fur-
“The CNB hike in the benchmark rate is the first since February 2008”
ther hikes could be in the pipeline for later this year or in early 2018, but at the same time the central bank struck a notably dovish tone at its press conference.
The CNB hike in the benchmark rate is the first since Febru- ary 2008, and breaks a run of close to five years during which rates have sat at virtually zero. The CNB board also decided to increase the Lombard rate by 25bp to 0.50% and keep the discount rate unchanged at 0.05%.
The move comes four months after the CNB dropped its cap on the koruna. Worries of a sharp rise in the value of the currency against the euro has clearly deterred a hike until now, but the koruna had made big strides in recent weeks, reducing the risk of an erratic response.
Still, the CNB was clear in noting the pressures on monetary policy saying inflation is “currently peaking” and argued that, despite strong wage pressure, growth in domestic costs will start to ease due to rising labour productivity growth.
The CNB said it expects core inflation to be fairly stable over the next 12-18 months, and that headline inflation will drop to its 2% target by early next year.
he Czech National Bank (CNB) became the first central bank in Europe to hike rates on August 3, upping them
by 20bp to leave the benchmark at 0.25% as the eco-
The CNB also noted imported inflation is expected to fall. Such issues have stayed the hand of policymakers in neigh- bouring Hungary and Poland, although interest rates in those countries have remained significantly above the Czech level. Another pressure point for the central bank is European Central Bank policy choices, which has pledged to keep its ultra-loose stance in place for some months.
Analysts are split on their forecasts over the direction of Czech monetary policy in the coming months. At Capital Economics they predict a gradual cycle of rising interest rates to 0.75% by the end of 2018.
“We think inflation will be higher than most expect,” writes Liam Carson of Capital Economics. “With the economy now operating at full employment, we expect wage growth to remain strong. The upshot is that, unlike the [CNB], we see core inflation rising a little further over the coming months. This will push headline inflation up towards the top end of
“Analysts are split on their forecasts over the direction of Czech monetary policy”
the Bank’s 1-3% target range by end- 2017 and we expect it to remain above the 2% mid-point of the range next year too.”
At Komercni banka analysts believe another hike could be
on the cards for this year, although they note that the CNB guided for a pause of up to 12 months. "This is a long time to wait, given the CNB’s significantly improved outlook for GDP growth in 2017 and 2018," the analysts say.
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