November 2, 2017 / 12:09 PM / a year ago

Czech central bank raises main rate by 25 bps to 0.50 pct

PRAGUE, Nov 2 (Reuters) - The Czech National Bank raised its main interest rate by 25 basis points to 0.50 percent on Thursday, the second increase since August, when the bank became Europe’s first monetary authority to embark on a tightening cycle.

All 16 analysts in a Reuters poll had expected the central bank to raise rates, and all except one saw a 25-basis-point move, with the outlier predicting a 50-basis-point change.

The Czech economy expanded by 4.7 percent year-on-year in the second quarter, pushing wages up and unemployment to the lowest level in the European Union, strengthening inflationary pressures. Leading indicators suggest the trend will continue into the next year.

The rate increase widens an interest rate differential with the European Central Bank, which said last week that it would cut its bond purchases in half from January but also extend the programme until the end of next September.

Bank of England meanwhile raised rates for the first time since 2007 on Thursday.

Czech markets will focus on a new quarterly central bank forecast for indications on how steep rate increase the bank expects going forward.

The last forecast, in August, saw the average 2018 repo rate at 0.49 percent. But several central bankers have since said they expected a more pronounced tightening, since the Czech currency has avoided strengthening enough to hold back rate increases.

The Reuters poll showed most analysts predicted another rate hike for the first quarter of 2018 after a pause in December.

The currency, the crown, has gained by 5.6 percent to the euro since the bank dropped a cap on the exchange rate in April. The currency’s firming has been slowed by tens of billions of euros worth of crown positions built up before the end of the weak-currency policy.

The crown has been gaining more in recent weeks. Ahead of the decision on Thursday, the crown touched its highest levels since the float, its strongest since October 2013. It firmed a touch to 25.530 to the euro after the decision.

Investors have maintained their appetite for Czech assets, with foreign holdings of Czech domestic government bonds for the first time crossing 50 percent of the outstanding stock in September.

The board also voted on Thursday to raise the Lombard rate by 50 basis points to 1.00 percent and kept the deposit rate at 0.05 percent.

Governor Jiri Rusnok will present the quarterly update to the central bank’s staff economic forecast at a news conference scheduled for 2:15 p.m. local time (1315 GMT). (Reporting by Jan Lopatka and Robert Muller, editing by Larry King)

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