June 27, 2018 / 11:24 AM / 5 months ago

UPDATE 3-Czech central bank opts for quick rate hike as crown wallows

* Czechs deliver 4th hike in tightening cycle

* Weakened crown, strong wage growth lead to quick move

* Governor Rusnok: tough to say how pace of hikes will look

* Crown firms on hike before giving up gains (Adds Governor comments, outlook on rates, market movements)

By Jan Lopatka and Jason Hovet

PRAGUE, June 27 (Reuters) - The Czech central bank raised its benchmark interest rate by 25 basis points on Wednesday, as a weakening currency and rising pressures in Europe’s tightest labour market led it to shift policy sooner than expected.

The Czechs have been the fastest in Europe to reverse years of loose monetary conditions, contending with an economy set to grow 4 percent this year and housing and jobs markets that are overheating while it aims to keep inflation at its 2 percent target.

Added to that since the last rate hike in February is an investor retreat from emerging markets caused by rising U.S. yields - giving little aid to ratesetters betting on a firming currency to help tighten monetary conditions.

On Wednesday, Czech National Bank (CNB) policymakers voted unanimously to raise its benchmark two-week repo rate to 1.00 percent.

Governor Jiri Rusnok, though, gave no signals the somewhat surprising move was the start of a more aggressive rate path than indicated by the bank’s staff forecasts - which had only pointed to further rises in rates at the turn of the year.

“For the moment, our reaction is adequate, appropriate,” he told a news conference. “We were very confident today that we do not need to wait for any further data..., that we can do the standard hike today without any larger risk.

“It may be that the increase will be sufficient for the moment. If we deem that we can go further in the path toward equilibrium interest rates, we will not hesitate and do it.”

Markets had put the chances of a rate increase at nearly 50 percent. A slight majority of analysts said the bank would wait until August or later before raising rates for the fourth time in a tightening cycle that began last August.

The crown rose as high as 25.690 to the euro, from 25.840, after the decision. By 1340 GMT, it have given up those gains to trade up 0.2 percent on the day at 25.861.

Interest rates swaps rose more than 5 basis points while bond yields rose across the curve.

CROWN DRIFT

The crown has traded 1 to 3 percent weaker than the bank’s staff forecasts assumed. While the outlook saw the crown at an average 25.20 to the euro in the second quarter, its 90-day moving average was 25.54 on Wednesday.

In the bank’s model, a 1 percent deviation in the crown rate from the forecast corresponds to a 25 percent interest rate move.

Rusnok said the crown played a strong role in the bank’s debate but that there was no reason to panic about its weakness, saying moves of up to 5 percent for a currency from a small open economy were normal.

A number of central bankers, including Rusnok, had spoken about chances of a rate hike because of the crown and strong growth in wages, which rose at their fastest in 15 years in the first quarter. Unemployment is at its lowest in two decades.

At the same time, the record low interest rates and a lull in supply have pushed Prague property prices up at double-digit rates, prompting the bank to introduce tighter requirements for mortgage lenders and borrowers.

The repo rate’s 1 percent level, reached while the European Central Bank has maintained its ultra-loose policy stance, is the highest in eight years.

In central Europe, only Romania has embarked on rate hikes this year. Hungary, whose rates are at record lows, signalled this month for the first time an end to its era of cheap money.

Reporting by Jan Lopatka, Jason Hovet and Robert Muller; editing by John Stonestreet

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