November 2, 2017 / 3:44 PM / a year ago

UPDATE 1-Modest Czech rate hike and outlook for next year punch crown lower

* Unanimous vote for modest 25bps hike

* Forecast sees fewer rate hikes than market expects

* Central bank board sees upside inflation risk

* Governor does not rule out December hike (Updates throughout with central bank comment, crown weakening, outlook)

By Robert Muller and Jan Lopatka

PRAGUE, Nov 2 (Reuters) - The Czech National Bank lifted interest rates for the second time this year to move further ahead of other European policymakers in monetary tightening, but knocked the crown back with an outlook showing fewer hikes ahead than many expected.

The bank’s board voted unanimously for a 25 basis point rise to bring the main two-week repo rate to 0.5 percent, opting for a modest increase after some bankers had talked about chances of a 50 basis point move.

The Czech economy is on target to expand more than 4 percent this year, wages are growing the fastest in a decade and unemployment is the lowest in the European Union, strengthening inflationary pressures.

Governor Jiri Rusnok said a sharper hike was discussed but in the end the board decided 7-0 for a standard step, although he left open the possibility of another hike, maybe in December.

“Eventually there was the unanimous decision that there was no reason for some strong steps and that we have enough room to raise rates ... in the coming months and at upcoming meetings,” Rusnok said.

The central bank raised its economic forecasts on Thursday but the updated outlook pointed to a slower rise in rates over the next year than what many analysts had expected.

The outlook saw growth at 3.4 percent in 2018, above an earlier estimate of 3.2 percent. For 2017, it raised the outlook by almost a full point to 4.5 percent.

“We have (growth) speeds that we did not expect by a mile ... and we are in a situation of total exhaustion of any reservoir of workers,” he said.

“Our decoupling, optically marked decoupling, from the ECB is possible, natural and in my opinion correct.”

The European Central Bank said last week that it would cut its bond purchases in half from January but also extend the programme until the end of next September. The Bank of England, meanwhile, raised rates for the first time since 2007 on Thursday.

Rusnok said the board saw upward inflation risks to the new forecast, but the comments failed to impress a market that was tuned for more drama in Thursday’s discussion and a faster climb in rates to be pencilled into the new outlook.


The bank’s view of market interest rates, a proxy for policy rates, was only modestly upgraded, with a forecast for the 3-month interbank Pribor rate at 0.9 percent next year, up only 0.2 percentage points from the last forecast.

Czech inflation stood at 2.7 percent in September, and the new outlook saw it remaining above the target until the first quarter of 2019.

The crown sharply fell from four-year peaks in afternoon trade, losing more than half a percent to 25.690 to the euro after testing the 25.50 level in the time between the rate decision and news conference detailing the vote and outlook.

“The rate forecast is not as hawkish as the market expected,” ING economist Jakub Seidler said, adding it showed only one rate increase next year. “The economy is doing well so definitely it is reasonable to expect more than one hike in 2018.”

The crown currency has gradually gained since the bank dropped a cap on the exchange rate in April that had kept the currency weaker than 27 to the euro since 2013, the staple of the bank’s policy after it cut rates to near zero in 2012.

The crown is tightly intertwined with the rate path in the trade-dependent economy, with firming narrowing the scope for rate hikes and vice versa.

Rusnok said it expected further firming. But he noted any sharp appreciation was being held back by tens of billions of euros worth of crown positions built before the cap exit. (Reporting by Jan Lopatka and Robert Muller; Writing by Jason Hovet; Editing by Alison Williams)

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