The Czech National Bank (CNB) raised the main interest rate by 0.25 percentage points (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.
The hike was widely anticipated by the Czech analysts and with 80% probability also by the market. The main reasons for the hike are domestic – strong wage growth, a weaker koruna than anticipated, and inflation exceeding the CNB target of 2%.
“According to the CNB, the main reason was the weak koruna. The Czech currency is at the moment suffering from global uncertainties and is not strengthening fast enough,” ING chief economist Jakub Seidler said.
CNB governor Jiri Rusnok said that another hike might occur as soon as September.
The central bank also issued a new macroeconomic outlook, lowering its forecast for GDP growth to 3.2% in 2018 from its previous estimate of 3.9%. For 2019, the national bank left its growth projection at 3.4%.
In its forecast, the CNB said that the average exchange rate will be 25.50 koruna to the euro in 2018 and 24.60 to the euro in 2019. The prediction is 0.50 of a koruna weaker for 2018, and 0.20 of a koruna in 2019. However, the Czech currency should strengthen to 24.20 against euro in 2020.
Inflation is expected to accelerate in the third and fourth quarter of 2019 to 2.1% and 2% respectively.
Previously, the CNB raised the main interest rate by 0.25% to 1% at its policy-setting meeting on June 27. The six present bank board members voted unanimously in favour of the move while one member was absent.
“The last time when CNB raised the interest rates two times in a row was 11 years ago,” Cyrrus chief economist Lukas Kovanda said Thursday.
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.