November 1, 2018 / 3:11 PM / 10 months ago

UPDATE 2-Czech central bank delivers fourth straight rate hike, more next year

* Czech central bank votes 5-2 for rate hike

* One board member wanted bigger increase

* Governor says hike is likely last rate move this year

* Weak crown points to higher rate path in 2019

* Staff forecasts; Statement (Adds Governor comments, outlook, markets)

By Robert Muller and Jan Lopatka

PRAGUE, Nov 1 (Reuters) - The Czech National Bank raised interest rates for a fourth straight meeting on Thursday to keep ahead of inflation pressures stemming from the European Union’s tight labour market, and it signalled more tightening next year.

With the crown currency caught in emerging market pressures, the Czech central bank has been the most aggressive in rate increases in the EU since first lifting borrowing costs from near zero last year.

It has raised rates in seven steps while the European Central Bank and most others in central Europe have kept policy loose. Thursday’s hike marked the quickest succession of Czech rate rises since the bank started inflation targeting in 1998.

Governor Jiri Rusnok said that another increase at the next meeting, on Dec. 20, was unlikely - but not excluded. He also said new bank forecasts were showing a higher rate path next year than previously expected.

The crown, a major factor for import prices and inflation, has consistently undershot central bank assumptions this year due to global market swings.

“The biggest change from the previous forecast is a later renewal of the appreciation of the crown,” Rusnok said. “Together with other factors, the weaker crown leads to a higher interest rate path next year.”

He said the bank could still hike again in December but only if global market pushed the crown to weaker-than-expected levels.

He also said the board saw a slight pro-inflationary risk to the staff forecast, again stemming from the exchange rate.

The currency is mired in heightened market worries over risks from emerging markets like Turkey and euro zone member Italy’s debt.

The crown traded up 0.3 percent on the day at 25.845 to the euro at 1415 GMT.


On Thursday, the board voted 5-2 to raise its key two-week repo rate by 25 basis points to 1.75 percent, as expected by all 14 analysts in a Reuters poll. One dissenting board member called for a 50 basis-point hike while one voted for no change.

In new staff forecasts, the central bank expected a slightly weaker exchange rate than previously seen, at an average of 24.7 per euro next year. It cut its economic growth outlook by 0.1 percentage points, respectively, to 3.1 percent in 2018 and 3.3 percent in 2019.

It raised its prediction for the average 2019 three-month interbank market rate, seen as proxy for the policy rate, by 0.3 percentage points to 2.0 percent.

The Czech economy has had the lowest unemployment rate in the EU at around 3 percent, which is pushing wage demands up at the fastest rate in 15 years.

Thursday’s meeting was the last for vice-governors Vladimir Tomsik and Mojmir Hampl as their terms end this month. Hampl has been among the most hawkish voices on the seven-member board.

Czech President Milos Zeman is due to appoint economist Ales Michl, who has been an adviser to Prime Minister Andrej Babis, and Tomas Holub, the central bank’s head of the monetary department, to the board later this month. (Reporting by Robert Muller and Jan Lopatka; Writing by Jason Hovet; Editing by Hugh Lawson)

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