UPDATE 3-Czech central bank surprises with one last rate hike, sends crown up

(Updates with central bank governor comments, markets)

PRAGUE, Feb 6 (Reuters) - The Czech National Bank delivered a surprise interest rate hike on Thursday, one last move in a long series of tightening going back to 2017 to rein in domestic prices pressures persisting in a slowing economy.

With much of Europe and the euro zone either maintaining or expanding a loose monetary policy stance, the Czech central bank was among the few that had kept alive a debate on a hike, but the market expected no change on Thursday and no analysts in a Reuters poll had forecast any tightening this year.

Ratesetters voted against calls for a rate hike at the previous three meetings even though the bank’s outlook - confirmed in an update on Thursday - had implied rates could rise before falling again later in 2020.

The board voted 4-3 to raise the main two-week repo rate by 25 basis points to 2.25%.

Governor Jiri Rusnok told a news conference that the debate was close, as before, and likely marked the end of tightening.

“What is important is that the increase that we had already signalled in the past... that happened today,” he said.

“(Going) further it is an open issue, whether it will be stability of rates or the situation will be so favourable that we could even consider some lowering.”

“We do not expect that inflation pressures will escalate further in such a way that we would have to react by a further increase,” he added.

The move pushed the crown to a fresh seven-year high as it firmed as much 0.8%, touching 24.876 to the euro before easing back to around 25.0 after Rusnok’s comments on no more hikes.

Interest rate swaps climbed as much as 17 basis points on the one-year contract, before giving back half of the move, and by up to 10 basis points for five-year maturities.

“I would put slightly more weight to leaving interest rates at the current level for the rest of this year. But if the development abroad gets worse, a rate lowering may occur,” said analyst Jiri Polansky of Ceska Sporitelna.


The rate increase came after inflation hit 3.2% in December, the second month above the 3% upper boundary of the central bank’s tolerance band around its 2% target.

Rusnok said those arguing for a hike pointed out inflation was above 2% a year ahead in the updated staff outlook.

The updated forecasts saw inflation higher this year than the last outlook, peaking at 3.5% in the first quarter and staying above 3% for much of 2020 before a fall in 2021.

Price pressures have been driven by home-grown demand as unemployment is around historic lows and wages keep rising.

This has buoyed the economy even as weakness in the euro zone and uncertainties over global trade - seen in U.S.-China talks and also now in a coronavirus outbreak in China - seep into the Czech economy.

The bank’s new outlook slight revised growth lower this year to 2.3%, down from 2.5% estimated in 2019. (Reporting by Robert Muller and Jan Lopatka Writing by Jason Hovet Editing by John Stonestreet and Jonathan Oatis)