Czech National Bank likely to hike interest rate in August

The Czech National Bank might become the first central bank in the CEE region to hike interest rates, noted Erste Group in a research report. Nearly everything indicates that the central bank might hike in the third quarter, that is either during its monetary policy meeting at the start of August or during the meeting to be held at the end of September. But the communication of many CNB representatives has probably recently been sometimes difficult for the markets to fully understand. It is likely to have been influenced by the tough economic background and many factors that the bank board members require to take into account when setting monetary policy, stated Erste Group.

The CNB might hike rates by 20 basis point in August; but, the discussion is unlikely to be easy and some bank board members might want to wait until the end of September. Meanwhile, the central bank is unlikely to wait too long with the first hike because of the likelihood of a loss of credibility in the event of another unexpected swing in the communication. Furthermore, the CNB is now in a comparatively safe situation as the likely rise of the 2W repo rate would have just limited effect on the economy while lowering the FX risks and enhancing financial stability, said Erste Group.

“In our view, the risk associated with the possible outflow of foreign capital could be the main reason for an early (August) hike. This risk could also be behind the changes in recent CNB communication”, added Erste Group.

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