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May 2, 2019 3:34 pm | FILED UNDER: business

CNB Raises Interest Rates To Highest Level In Decade

By Petr Dubinsky Financial Chart on computer screen

The Czech central bank raised interest rates to the highest in a decade as a persistently weak koruna adds to inflationary pressure.

After leading Europe with five hikes last year, the bank raised its benchmark a quarter-point to 2 percent on Thursday. At the previous three meetings, it kept rates unchanged as Brexit, trade wars, and weaker demand from neighboring Germany posed risks to economic growth.

“Despite some persisting foreign uncertainties, recent Czech National Bank board member comments signaled there’s higher support to back an interest-rate hike today,” ING Groep NV said in a report before the decision. “This is due to high inflation, a weak koruna and tentatively declining Brexit uncertainty.”

 

The Czechs stand out as they defy a global pullback from monetary tightening led by the U.S. Federal Reserve and the European Central Bank. Rapid wage growth and the koruna’s inability to strengthen as forecast have helped push inflation to the top of rate-setters’ 1 percent-3 percent tolerance band

 

In comparison, Poland plans to keep borrowing costs at a record low until at least 2020 despite a jump in inflationin April, while Hungary is in wait-and-see mode after taking a first tightening step in March.

 

Czech central bank Governor Jiri Rusnok will comment on the rate decision and release the highlights of new quarterly staff forecasts at 2:15 p.m. in Prague.

New Model

 

In their deliberation, the seven board members may have taken into account an alternative set of projections based on a new forecasting model the bank plans to switch to in the second half of 2019. The tool is designed to more accurately predict factors such as the exchange rate, household spending and the impact of price developments abroad.

The rate increase hike was predicted by most economists polled by Bloomberg. Before the meeting, forward-rate agreements showed money-market investors saw at least a year of borrowing costs staying on hold after the hike.

 

“The CNB is likely to downgrade its economic forecasts when it publishes the new inflation report,” said Jiri Pour, a Prague-based economist at UniCredit SpA. “We expect the hike to be the last one in the current cycle.”

 

Via Bloomberg

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