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The CNB Council is likely to raise its interest rates again, analysts say. The weakness of the crown is also the reason for that.

July 2018 /

The base interest rate should be raised by a quarter percentage point to 1.25 percent at the Czech National Bank's Board meeting on Thursday  . 

The Czech National Bank Bank Board is likely to raise the base interest rate by a quarter percentage point to 1.25 percent at its Thursday session. The reason is the weaker koruna exchange rate, higher inflation and the saturated labor market. This is apparent from analysts' statements.

By a quarter of a percentage point, the board raised the base interest rate at its last session at the end of June. All six members of the CNB Bank Board were voting for the rate increase. It was then criticized by the Chamber of Commerce. According to her president, Vladimir Dlouhý, it was an early and surprising measure that can strengthen the crown, make the conditions for exporters more difficult and make the money more expensive.

The exchange rate of the koruna has increased from CZK 25.94 / EUR to around CZK 25.63 / EUR since June. At the beginning of July, however, the koruna also weakened when it was over 26 crowns for the euro. In the May forecast, the CNB expects the koruna's average exchange rate to be CZK 25 / EUR for the whole of this year.

"As the CNB's chief economist, Tomáš Holub said, the new forecast of the Bank Board will require much faster rates, as the koruna will not move as fast as the CNB predicted, but the market is expecting a rise in rates in the next week with a probability of 80 percent, "said ING chief economist Jakub Seidler.

According to Seidler it is Holub´s statement which is more important than a similar recent statement by Vice-Governor Mojmir Hampl and Vojtěch Benda's Board member on Rising Rates. "Mr. Holub has surprisingly estimated, to some extent, the changes in the upcoming forecast, which will assume significantly higher rates than the previous forecast, especially in a shorter horizon," he added.

Rising rates? More than sure

"The CNB seems to be ready to support the increase in rates by a further quarter of a percentage point, and the reason for such a decision will justify  CNB new inflation report, which apparently states that inflation will remain above the target at least for a few months, the overheating of the economy does not diminish and the koruna is significantly weaker, than was expected by the previous forecast, "said also senior economist UniCredit Bank Pavel Sobisek.

By the end of the year, after the August increase in the CNB's rates the CNB expects one another such step. According to Sobíšek, the development of rates in the next year will be affected mainly by the koruna's exchange rate response to the CNB's current monetary policy.

"The increase in interest rates at the upcoming meeting is a good thing," commented Komerční banka's economist Jana Steckerová. Hampl´s and Benda's recent speeches suggest that some bank board members could raise their hands even for raising half a percentage point interest. "However, in our opinion, this suggestion will not be a major one at the August meeting," she added.

Growth rates are also expected by Roklen's economist Michal Šoltés. "A newly released forecast will also be interesting for the markets, because it will show how the CNB expects exchange rate development and how CNB plans further interest rate rise," he said, as compared to the previous forecast in May, the August one can bring a weaker crown, but a faster rate rise.

The meeting of the CNB Council will be attended by six of its seven members on Thursday. Oldřich Dědek will not be present at the meeting.

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