January 23, 2018 / 3:25 PM / a year ago

Czech central banker says time to raise rates

PRAGUE (Reuters) - Positive data from the Czech and European economy warrant a 25 basis point interest rate hike at the central bank board’s policy meeting next week, and one or more hikes could follow later this year, board member Marek Mora said on Tuesday.

The Czech National Bank is seen in central Prague, Czech Republic, August 3, 2017. REUTERS/David W Cerny

The bank raised rates to 0.5 percent last year as the fast-growing economy allows for tighter policy after years of stimulus delivered by weak exchange rate and interest rates near zero.

A hike at the Feb 1. meeting where the board will discuss new quarterly economic forecast is expected by the market.

“The standing forecast saw (a hike) in the first quarter. We will see what the new forecast tells us but considering that I read latest numbers as aiming slightly upward, I would see the hike in February as more certain,” Mora said in an interview.

He said euro zone growth indicators have been surprisingly good, helping the short-term outlook.

“This works rather in a pro-inflationary way and it confirms to me the probability — it now approaches certainty — that I see two hikes (this year), and if (data) continue to surprise us on the upside, perhaps even more.”

He said one factor working in the other direction in the medium term was the strength of the euro versus the dollar, which could also pose anti-inflationary risks at home.

“This does not play in the hand of the ECB, it narrows the room for normalisation of monetary policy and raises the question whether it will have any impact on the end of quantitative easing,” he said.

The Czech bank has said it wanted to raise rates gradually over time to what it sees a normalised level about 1 percent above inflation, or about 3 percent.

The crown’s 6.3 percent firming versus the euro since the bank dropped an exchange rate cap last April may continue at similar pace this year, Mora said.

“But eventually in about a year’s time (I would expect) a slowdown to equilibrium trajectory, our model has about 1.5 percent.”

The more the crown firms, the tighter monetary conditions become, leaving less room for rate hikes.

Mora said the labour market continued to be very tense given record-low unemployment, the lowest in the EU, but wages have not had as much inflationary impact so far as was seen in the past. This posed the question whether there may be a bigger jump ahead, he said.

Reporting by Jan Lopatka; Editing by Richard Balmforth

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