Czech National Bank likely to hike rates in second half of 2017

The termination of the FX cap in April could be seen as the first step on the tightening of Czech monetary policy. The Czech National Bank did not use any other policy measures during the exit. At present, the central bank is in a wait-and-see mode, assessing the overall economic situation and inflationary pressures, noted Erste Group in a research report. The central bank’s stance has been slowly changing from slightly dovish toward a more hawkish view. Therefore, there is a risk that the CNB might hike its rate in the second half of this year, although this will depend on several factors.

The ECB policy is one of the factors. The Czech central bank would be wary with the interest rate hike if the euro area’s monetary policy stays loose. In that case, the interest rate differential would rise, with negative impacts for exports and inflation, stated Erste Group.

Secondly, the wage growth factor surprised positively in the first quarter and therefore indicates that inflationary pressures might be accelerating. And thirdly, housing prices have risen considerably that might be seen by some bank board members as a possible risk for financial stability in the future.

“In our view, the current high wage growth and tight conditions in the labor market could be the most important reasons why several bank board members may be inclined more towards the possibility of a hike this year”, added Erste Group.