Czech raises rate 25 bps as inflation exceeds forecast

      The central bank of the Czech Republic raised its benchmark 2-week repurchase rate for the fourth time since embarking on a monetary tightening cycle as higher than expected inflation at home and abroad along with a weaker koruna made it necessary to raise rates earlier than forecast.

      The Czech National Bank (CNB) raised its policy rate by another 25 basis points to 1.0 percent and has now raised it by 95 basis points since August 2017 when it began raising rates in response to accelerating inflation from a booming economy and rising wages.

      It is CNB's second rate hike this year following an increase in February and was largely expected after CNB Governor Jiri Rusnok's earlier this month said the combination of a weaker than expected koruna and higher than expected wage rises had made room for an earlier rate rise.

      At its previous policy meeting in May, when the CNB left its rates steady, Rusnok said a rate hike toward the end of the year was being considered. However, he also said an earlier hike could not be ruled out if the situation differed significantly from assumptions.

      Since May two things have changed. First, oil prices have risen more than than expected and the consensus now looks for prices in 2018 to average $73.2 a barrel, up from CNB's forecast of $66.9.

      Secondly, the U.S. dollar has risen on a combination of strong U.S. economic growth, a more hawkish Federal Reserve and a more dovish European Central Bank (ECB).

      "These two factors are thus jointly fostering a higher koruna price of oil," Rusnok said, adding a desired tightening of monetary conditions through a higher exchange rate was not taking place and this trend may persist.

     "It is therefore necessary and appropriate to increase interest rates earlier than implied by the current forecast presented in early May," he said.

      In May the CNB forecast inflation of 1.9 percent in May but it turned out to be 2.2 percent, above the bank's 2.0 percent target due to higher prices of food and non-alcoholic beverages, and transport costs, including fuel.

      Wages rose 8.6 percent in the first quarter, above the forecast 8.5 percent, as a shortage of available labour results in a overheated jobs market.

      "At its meeting today, however, the Bank Board assessed the risks to the current forecast as being inflationary," Rusnok said.

      In May the CNB forecast a 2018 euro-dollar rate of 1.23 but consensus is now looking to 1.20. For 2019 the euro-dollar rate has fallen to 1.22 from May's 1.24 forecast.

      In response to today's hike, the koruna rose, reversing a steady decline since mid-April, but then quickly gave up its gains to end largely unchanged.

      The koruna was trading at 25.9 and is 0.8 percent below its level at the start of 2018.

      But the koruna is still significantly higher than during nearly five years of extraordinary easy policy when the CNB used interventions in currency markets to keep the koruna below 27 to the euro to avoid deflationary pressures.

      In May the CNB forecast an average exchange rate of the koruna to the euro of 25 and in 2019 a rate of 24.4.

      In an unanimous decision, the CNB board also raised its Lombard rate, which is used by banks to obtain overnight liquidity and sets a ceiling for short-term rates, by 50 basis points to 2.0 percent. However, it maintained the discount rate, which sets a floor for short-term money market rates, at 0.05 percent.

      While inflation has risen faster than expected, the Czech economy has slowed more than expected due to a stronger negative contribution of net exports, lower inventory build-up and household consumption.

       Annual growth in the first quarter was 4.4 percent, below 4.9 percent forecast, and down from 5.5 percent in the fourth quarter of last year. In May the CNB forecast that growth this year of 3.9 percent and the slow further to 3.4 percent in 2019.

      Earlier this week the International Monetary Fund (IMF) commended the Czech Republic for its strong economy and favorable outlook though it also said the decline in the labour force poses a longer term challenge and in the near term a decline in global trade from increased protectionism poses a major risk given how tightly integrated the Czech economy is in global supply chains.

      The IMF forecast growth this year of 3.7 percent, down from 2017's 4.4 percent,  and then growth of 3.2 percent in 2019 and 2.5 percent in 2020 as domestic demand slowly cools from 4.0 percent growth this year to 3.7 percent and 3.1 percent in the next two years.

       Inflation is forecast to average 2.3 percent this year, slightly down from 2.4 percent last year, and then 2.3 percent in 2019 and 2.0 percent in 2020.

Czech holds rate, sees rates rising in line with forecast

     The central bank of the Czech Republic left its two-week benchmark repo rate at 0.05 percent in a unanimous decision by its board and said "it is likely that the CNB will increase interest rates in line with the prediction" in view of the current forecast and balance of risks.
     In April the Czech National Bank (CNB) took the first step toward normalizing its monetary policy by abandoning its commitment from November 2013 to keep the koruna from exceeding to 27 to the euro as an additional tool to stave off deflation.
      This move to cap the koruna's exchange rate followed the CNB's cut to the current level of the repo rate, essentially zero, in November 2012.
      "Interest rate increases will be conditional on the evolution of all key macroeconomic variables, including the exchange rate of the koruna," the CBN said.
      In May the CNB forecast that interest rates will move higher in the third quarter of this year and 2018, with the 3-month PRIBOR (the Prague interbank market rate) rising to 0.8 percent from 0.5 percent this year. This 2018 forecast was lowered from its previous forecast of 1.1 percent, with any rate increases dampened until mid-2018 due to asset purchases by the European Central Bank.
       "The CNB Bank Board assessed the risks to the current inflation forecast at the monetary policy horizon as being slightly inflationary," the CBN said, adding that in the quarters ahead the exchange rate of the koruna may be weaker than forecast due to the closing of koruna positions by investors.
      In contrast, lower oil prices pose an anti-inflationary risk to the forecast," the CNB said.

Czech keep policy, see higher inflation, market rates, FX

   The Czech National Bank (CNB) left its benchmark two-week repo rate at 0.05 percent and confirmed that it will "not discontinue the use of the exchange rate as a monetary policy instrument before 2017 Q2" and its board considers it likely that this commitment will be stopped "around the middle of 2017."
    In an update to its economic forecasts, the central bank of the Czech Republic raised its forecast for inflation following the sharp rise at the end of 2016 and expects inflation to continue to rise into the upper half of its target range before easing back toward the target in the first half of 2018.
    The CNB targets inflation of 2.0 percent, plus/minus 1 percentage point.
    "According to the new forecast, the conditions for sustainable fulfilment of the 2% inflation target in the future, i.e. also after the assumed return to the conventional monetary policy regime, will be met from around mid-2017," the central bank said.
    The CNB has kept a cap on the exchange rate of the koruna of around 27 to the euro since November 2013 in an effort to stave off deflation after cutting its benchmark two-week repo rate to its current level of 0.05 percent in November 2012.
     The koruna has been coming under sustained upward pressure in recent weeks as investors speculate the CNB may scrap its exchange rate commitment earlier than mid-year following the rise in inflation to a four-year high of 2.0 percent in December and based on the experience from the Swiss National Bank's surprise lifting of its cap on the Swiss franc two years ago, which led to a jump in its exchange rate.
      The CNB assumes that market interest rates in the Czech Republic will remain at their current low level until the middle of this year and then rise after the exchange rate commitment is discontinued, leaving a positive differential against rates in the euro area as the European Central Bank (ECB) continues with quantitative easing.
    The exchange rate of the koruna is forecast to appreciate against the euro in the second half of this year though the CNB cautioned that this forecast does not take into account the impact of exporters' hedging of exchange rate risks as well as the closing of koruna positions by financial investors.
    "The market 'overboughtness' may even lead to depreciation of the koruna," CNB said.
    The recent rise in inflation is mainly due to a recovery in food prices and higher fuel prices with higher wages expected to continue to boost domestic costs while a rise in producer prices should also push up core inflation, the CNB said.
     In a summary of its forecast - the full inflation report will be released tomorrow - the CNB expects inflation in the first half of 2018 to average 2.5 percent, up from its previous forecast of 2.3 percent, and then ease to 2.3 percent, unchanged, in the second half.
    Economic growth is expected to be slightly lower than previously forecast due to a lower contribution of exports.
    The CNB estimated growth in 2016 of 2.4 percent, down from its previous forecast of 2.8 percent, and then expand by 2.8 percent this year, down from 2.9 percent, and remain at 2.8 percent growth in 2018, also lower than 2.9 percent previously forecast.

Czech keep rate, koruna cap won't be scrapped before Q2

    The central bank of the Czech Republic left its benchmark two-week repo rate at 0.05 percent, as expected, and affirmed that "it will not discontinue the use of the exchange rate as a monetary policy instrument before 2017 Q2."
     The Czech National Bank (CNB) has kept a cap on the exchange rate of the koruna of around 27 to the euro since November 2013 after cutting the benchmark two-week repo rate to its current level of 0.05 percent in November 2012.
    "A need to maintain expansionary monetary conditions to the current extent persists," the CNB said, adding its board still expects the exchange rate commitment will be "discontinued in mid-2017."
    The central bank reiterated that it expects any rise in the koruna after it scraps the limit to be dampened by the hedging of exchange rate risks by exporters during the time of the exchange rate commitment as well as by closing koruna positions by financial investors.
    "In addition, the CBN will stand ready to intervene to mitigate potential exchange rate fluctuations," the central bank said, seeking to dampen exchange rate speculation.    
    Inflation in the Czech Republic is on the rise, along with the euro area, hitting 1.5 percent in November, the high rate since June 2013 and above the CNB's forecast of 1.0 percent.
    The CNB expects inflation to continue to rise and slightly exceed its 2.0 percent target in late 2017 and early 2018 before returning to the target during 2018.
    "According to the current forecast, sustainable fulfillment of the target, which is a conditions for a return to conventional monetary policy, will occur from mid-2017 onwards," the CNB said, adding it considers the risks to its forecast as balanced.
    In its presentation, the CNB board showed how inflation and wage growth has topped its forecasts while economic growth has been below expectations. In the third quarter of this year, the Gross Domestic Product grew by an annual rate of 1.9 percent, below the CNB's forecast of 2.5 percent.
    Average wages grew by 4.5 percent in the third quarter, above a 4.2 percent forecast.