Czech National Bank guides for third quarter rate hike

By bne IntelliNews May 12, 2017

The Czech National Bank expects the CPI to remain towards the top of its tolerance band through 2017, according to the central bank’s latest inflation report released on May 12. The forecast is consistent with a hike in the benchmark interest rate in the third quarter of 2017, it adds.

The CNB board approved the second quarter inflation report on May 10. The accompanying guidance for a rate rise in July-September is something of a surprise given that the surge in the CPI around the turn of the year is showing signs of fading. Inflation stepped back to 2% in April. The tolerance band around the CNB’s 2% target runs 1pp each way.

The guidance comes despite a note in the central bank report that admits the effect of erratic commodities prices on the CPI remains significant, and that it is tricky to gauge just how much demand-driven price pressure there is in the market.

“The extent to which the current inflation pressures are fundamental and persistent is also uncertain,” the report reads. Still, the CNB expects that the CPI will pull back to sit close to the 2% target in early 2018. It also guides for another rate hike next year.

The fate of the koruna since the CNB lifted its cap on the currency last month is another significant element of uncertainty. While the central bank forecasts the koruna will appreciate through the year, driven by strong economic growth, it also notes that “appreciation may also be strongly dampened in the coming quarters by market ‘overboughtness’.” The return of koruna appreciation to pre-crisis values is not likely, the report suggests; it is expected to stabilise close to 1.5% a year.

“The exit from the exchange rate commitment was the first step towards a gradual return of the overall monetary conditions to normal,” the report sums up. “Subsequent interest rate increases will be conditional on the evolution of all key macroeconomic variables, including the exchange rate of the koruna. The CNB still stands ready to use its instruments to mitigate potential excessive exchange rate fluctuations if needed.”

The CNB forecasts an ambitious looking 3% growth in GDP in both 2017 and 2018. Most analysts expect economic expansion will be capped at 2.4-2.6%.


Related Articles

S&P warns return of political tensions in Macedonia could lower rating

Standard & Poor’s (S&P) Global Ratings affirmed on March 16 its 'BB-/B' long- and short-term foreign and local currency sovereign credit ratings on Macedonia, keeping the outlook ... more

Turkey’s CDS at 1-month-high and lira weakest in 3 months as economic clouds gather

The cost of insuring exposure to Turkish debt grew to a one-month high on March 16 as anxieties about Turkey’s economic difficulties and the Afrin military showdown in Syria unsettled markets. ... more

Turkish bond prices fall and lira sinks as economic and political jitters grow

Turkish bond prices fell on March 13 as a growing set of economic and political anxieties left investors fretting. To add ... more