No surprise as Czech National Bank hikes rates by 0.25pp with another increase in sight

No surprise as Czech National Bank hikes rates by 0.25pp with another increase in sight
By Jaroslav Hroch in Prague September 27, 2018

The Czech National Bank (CNB) increased the main interest rate for the third time in a row at its September 26 policy-setting meeting, raising it by 0.25 percentage points (pp) to 1.5%.

As bne IntelliNews reported, the move was widely anticipated by the market and Czech analysts. Six out of seven board members present voted for the hike.

“CNB will almost for sure increase the rate by 0.25 percentage points on Wednesday, September 26,” said UniCredit Bank chief economist Pavel Sobisek ahead of the decision.

At the same time, some analysts forecast that CNB will hike the rate one more time in November. “I think CNB didn’t say the last word and there will be one more increase,” said ING chief economist Jakub Seidler.

“According to the forecast, the rate should increase to 2.5% or 3%. But we don’t say it will happen until the end of the year. We will have a new outlook in November and we will see, but it cannot be ruled out,” said CNB governor Jiri Rusnok.

Earlier, Rusnok confirmed to Reuters that CNB might raise the main interest rate twice before the end of 2018.

“For me, [a move] is quite close because the way I see it we cannot spoil anything, the risk of being... hasty is minimal. I see very little in counter-arguments [for a later hike], or I see it as quite weak,” Rusnok said in an interview with the news agency. 

The main reasons for the current hike are, as previously, domestic. “Given the current economic situation, accelerating inflation, solid wage growth and relatively weak koruna, the increase will apparently happen,” said Seidler earlier.

The Lombard rate, which forms the upper limit of the bank’s corridor, was raised by 50bps to 2.50%, while the discount rate was raised to 0.50%.

Banks are not going to hike their interest rates; the change will be gradual. The same applies to the mortgage rate, which should be influenced mainly by CNB’s aggressive actions to burst a potential real estate bubble in June, which will come into effect on October 1.

According to Moneta Money Bank analyst Tomas Kostrhoun, the average mortgage rate should be around 3% by the end of the year, which is an annual increase of 0.8 pp.

In August, the mortgage rate rose to 2.53% from 2.5% in July, Fincentrum Hypoindex reported on September 19. The rate fell to a minimum of 1.17% in December before rising again to 2.28% this January.

Previously, the CNB raised the main interest rate by 0.25 pp to 1.25% at its policy-setting meeting on August 2, the first back-to-back increase in 11 years. The six present bank board members voted unanimously in favour of the move while one member was absent.

Previously, the CNB raised the main interest rate by 0.25% to 1% at its policy-setting meeting on June 27. As in August, the six present bank board members voted unanimously in favour of the move while one member was absent.

The CNB is among the few central banks in Europe that have raised borrowing costs lately. It has raised its two-week repo rate three times since August 2017. Prior measures included a very loose policy with near-zero rates and interventions to weaken the koruna and keep it above 27 to the euro.

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