A revved-up Czech economy is pointing to an interest rate hike as soon as this month and another possible move before the end of the year, central bank Governor Jiri Rusnok said in an interview with Reuters.
The Czech National Bank has lifted interest rates at its last two policy meetings, adding to hikes carried out since August 2017 when it first set out to begin normalizing monetary policy after a long period of ultra-loose measures.
Investors are giving a better than 70 percent chance that policymakers will hike the 1.25 percent, two-week repo rate CZCBIR=ECI further when they meet again on Sept. 26.
The latest data has underscored that view, showing growth is above expectations, wages continue to rise at their fastest pace in 15 years and inflation has been above target for all but three months since the beginning of 2017.
Rusnok said in the interview on Tuesday that he expected a serious debate on a possible interest rate move at the meeting and a hike was a strong possibility.
“For me, (a move) is quite close because the way I see it we cannot spoil anything, the risk of being… hasty is minimal,” he said. “I see very little in counter-arguments (for a later hike), or I see it as quite weak.”
The strong economy has contributed to home prices growing among the fastest in the European Union and unemployment falling to the lowest level in the bloc. Rusnok said growth “was moving at relatively high gear”.
It comes at a time when the crown currency has been caught up in emerging-market selling pressures, the latest caused by the Turkish lira’s slide.
The Czech central bank had been counting on a firming currency to help it keep inflation at bay this year before it revised weaker its crown exchange rate forecasts in its quarterly macroeconomic outlook in August, expecting the crown to stay under pressure before firming in 2019.
This move indicated a steeper rate path in 2018 to compensate for the sluggish crown, and Rusnok said he agreed the outlook still pointed to two interest rate hikes this year, calling it a “strong scenario”.
“It can be twice more by the end of the year, or quite soon in the coming period,” he said. However, he said he did not see any need to go beyond that as there was no urgent need.
WAITING ON CROWN
The crown remains the biggest wild card for the bank. It traded around 25.65 to the euro on Tuesday.
The latest outlook assumes an average exchange rate of 25.80 to the euro during the third quarter before a slight rise to 25.30 in the fourth quarter. By the first quarter next year the crown is forecast to firm to 24.80.
“We think (pressure on the crown) will fade out. Of course no one knows how quickly it will fade out. It is a big unknown,” Rusnok said.
Inflation accelerated to 2.5 percent in August, well above the bank’s 2 percent target. Unemployment stayed at 3.1 percent, according to labor office data, while job vacancies were a record high, surpassing the number of available workers for the fourth month in a row.
Amid that, wages grew a real 6.2 percent in the second quarter and the central bank forecasts nominal growth of 8.6 percent in 2018, increasing inflation pressures.
Rusnok said he noted the “swift pace” of core inflation in August, which had been resistant to moving upwards.
“We can see that there now, perhaps a bit more, and that gives us a bigger and more comfortable space for the idea of raising rates, of continuing with their normalization,” he said.
This article appeared in Reuters