July 16, 2018 / 12:05 PM / 9 months ago

'Overheating' Czech economy may warrant faster policy tightening: OECD

PRAGUE (Reuters) - The “overheating” of the Czech economy, visible mainly in the tight labor market, may lead to faster interest rate rises than anticipated, the OECD said in a report on Monday.

The Czechs have been the fastest in Europe to reverse years of loose monetary conditions, facing an economy set to grow by 3.8 percent this year, according to the OECD.

House prices and the jobs markets are “overheating” while it aims to keep inflation at its 2 percent target.

The Paris-based Organisation for Economic Cooperation and Development pointed to those factors as potential risks.

“There are signs of overheating as the economy is growing above potential, therefore the rise in inflation and wages may lead to a normalization of interest rates more rapidly than anticipated,” the OECD said in its economic survey.

The Czech National Bank (CNB) sees the economy as overheating in some aspects too.

The OECD recommended CNB to “gradually raise the policy interest rate and stand ready to fasten the pace if needed”.

The central bank raised its benchmark interest rate by 25 basis points to 1.0 percent on June 27, delivering the fourth rate hike since last August when it started its tightening cycle after more than four years of ultra loose policy which included rates near zero and interventions against the crown.

However, Governor Jiri Rusnok did not give any indication after the meeting that the 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.

The CNB board will meet again on Aug. 2, when the central bankers will assess a quarterly update to the staff outlook.

Reporting by Robert Muller; Editing by Alison Williams

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