Brexit Delay Provides Brief Window For Rate Hike

The delay to Brexit has potentially given the Czech central bank a small window to raise borrowing costs this year as it tries to put a lid on price growth before the economy slows, board member Tomas Holub said.

 

After leading Europe with five interest-rate hikes last year, policy makers in Prague will most likely deliver only one in 2019, Holub said in an interview on Tuesday. The delay of the U.K.’s departure from the European Union — possibly until October — has taken pressure off of global markets and lets the Czech central bank focus on domestic price pressures. Its next two to three meetings may be the best time to act before risks can reemerge, he said.

 

“If we need to increase interest rates, it would make more sense to do so in the first half of the year rather than later when we’re uncomfortably close to Brexit again,” Holub said. “I don’t regard zero hikes as a very likely scenario. Rather, I believe that room for at least one increase will emerge.”

The next policy decision due in two weeks, and the Czech National Bank is facing mixed signals from the export-oriented economy and abroad.

 

With major global central banks including the U.S. Federal Reserve and the European Central Bank turning more dovish, the Czechs have held the benchmark rate at 1.75 percent for the past three meetings. That came on the back of external risks, including a slowdown in neighboring Germany and the original March 29 deadline for Brexit, eclipsing a jump in Czech inflation to the top of the monetary authority’s tolerance band.

Fresh forecasts slated to be reviewed at the central bank’s May 2 meeting will likely raise the outlook for oil costs and producer prices abroad, while cutting growth projections for the euro area, the country’s main trading partner, according to Holub. The Czech economy remains “slightly overheated,” but private-sector wage growth and household consumption have trailed the bank’s estimates, and inflation will return to the 2 percent goal, he said.

Weak Koruna

 

“The domestic economy keeps creating inflationary pressure, but the peak of that pressure is behind us, and we now have pretty clear signals that they’re easing,” said Holub.

 

One factor that may allow the seven-member board to raise rates is a weaker-than-expected koruna, which is helping counterbalance the negative signals from home and abroad.

 

“There’s now a consensus within the board that, while the koruna may return to an appreciation trend in the medium term, its gains will be more gradual compared to our recent forecasts,” said Holub, who joined the panel last year after serving as the central bank’s chief economist. “That, in turn, may create room for another rate hike.”

 

Money-market bets on tightening rose after Holub’s comments, with most investors now positioned for a 25 basis-point hike over the next three months. That compares with almost zero likelihood of a rate increase in that period priced by forward-rate agreements three weeks ago.

 

While uncertainty about Germany and other trading partners speaks in favor of postponing hikes until more data is available, the central bank may struggle to tighten if risks of a hard Brexit resurface later in 2019, according to Holub.

 

“The first half of the year may be a window of opportunity,” he said.

 

Via Bloomberg