March 14, 2018 / 1:10 PM / 3 months ago

UPDATE 1-Czech inflation creating space for normalising policy-c.bank chief

LIBEREC, Czech Republic, March 14 (Reuters) - Inflation developments in the Czech Republic create room for further interest rate rises to normalise monetary policy, although loose euro zone policy is a limiting factor, central bank Governor Jiri Rusnok said on Wednesday.

The Czech National Bank (CNB) began reversing years of loose policy last year and has raised its main interest rate three times since last August after scrapping in April a cap on the crown to prevent the currency firming.

Its two-week repo rate stands at 0.75 percent.

The bank’s board will meet on March 29, with markets expecting a pause in rate rises for now. The bank last increased rates at its February meeting and said then that another rise was highly probable later in 2018.

Rusnok, speaking at a business roundtable in the northern town of Liberec, said that inflation development allowed for further “normalisation” of monetary policy.

This, he said, is despite some minor fluctuations, such as inflation slowing below the CNB’s 2-percent target last month for the first time since November 2016.

“Inflation is roughly where we want to see it, near our target,” he said. “The inflation pressures, created mainly by domestic demand, will remain robust, enough for inflation to be above target during this year.”

“That creates some space for us to continue with what we have started in early April last year, that means normalisation of monetary policy, meaning a return to some normal levels,” he added.

The central bank sees a normal real interest rate - adjusted for inflation - at around 1 percent.

With a fast-growing economy and the EU’s lowest unemployment rate pushing up wages and inflation, the Czech central bank is one of the few in Europe raising borrowing costs.

Growth reached 5.2 percent year-on-year in the fourth quarter. Rusnok said the economy was “overheating to some extent”.

But he said the loose policy of the European Central Bank was a limiting factor for further interest rate increases.

“When (the ECB) keeps its extremely loose monetary policy... we are also influenced indirectly, so that space for further firming or tightening of monetary policy is limited to a certain extent for us,” Rusnok said.

Reporting by Robert Muller; editing by David Stamp

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