Czech National Bank hikes interest rate by 20 bps, expects inflation to remain above 2 pct in 2017

The Czech National Bank hiked its interest rate by 20 basis points on Thursday, marking its first move since November 2012. Markets had anticipated this move by the CNB. Following the central bank’s decision to hike rates, the EUR/CZK pair dropped sharply after the announcement but weakened a bit afterwards. The EUR/CZK cross is expected to stabilize around the current level, noted Nordea Bank in a research report.

The rise in the policy rate is well grounded in the current macroeconomic conditions in Czech Republic. The nation’s GDP growth accelerated to 3 percent year-on-year in the first quarter of this year from 1.9 percent in the fourth quarter of 2016. The rise was mainly driven by strong private consumption and foreign demand. Household consumption is likely to continue at a strong rate because of tightening labor market with the real wage rising above 5 percent year-on-year and the jobless rate lying at one of the lowest level in the EU, stated Nordea Bank.

Both factors are expected to continue to put pressure on the inflation rate that continues to be above the 2 percent target, set by the CNB. The oil prices appear to have steadied above USD 50 barrel, which also should underpin a higher level of inflation in the nation and explains why the move came at the timing implied after the June MPC meeting.

Future central bank’s decisions would be highly dependent on the inflation path and the state of economy that has recently been feared to be overheating. The Czech central bank itself expects the next interest rate hike to come next year.

According to the central bank, the inflation rate is expected to continue to run above the 2 percent target in 2017 after a gradual drop to a level slightly lower than 2 percent year-on-year in late 2018. The CNB expects the economic growth to come in at 3.6 percent for the whole of this year, after a slight deceleration towards 3.2 percent and 3.1 percent in 2018 and 2019, respectively.

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