Czech central bank seen starting rate hikes on June 23

PRAGUE: The Czech National Bank is seen raising interest rates on June 23 after 13 months of stable policy as inflation pressures mount, with the economy showing strong signs of recovery as vaccinations help to bring the COVID-19 pandemic under control.

The central bank has held its main two-week repo rate at 0.25% since May 2020 after it made 200 basis points of emergency cuts as the pandemic hit.

Among 12 respondents in the Reuters poll, 10 saw a 25-basis points hike at next Wednesday's policy meeting, while two predicted no change.

A hike would be the bank's first policy tightening since February 2020, when it raised the main rate to 2.25%.

It would also put the bank alongside a handful of other rate-setters seen tightening this year, including Hungary's central bank, which holds a policy session on June 22.

Elsewhere in Europe, Norway's central bank could hike its key interest rate twice in the second half of this year as it looks set to exit pandemic-driven stimulus measures.

Looking further ahead, five out of 11 respondents saw another Czech hike by the end of the third quarter.

All of the respondents expected at least one more hike by the end of the year, bringing the main rate to 0.75%.

Four analysts saw two more hikes after June, putting the main rate at 1.00% by the end of 2021.

Five central bankers from the seven-seat board gave hawkish signals earlier this week, setting the scene for a possible hike.

The market has been pricing in growing chances of a near-term hike as well.

The 1x4 forward rate agreements, projecting where the market sees spot interbank rates one month from now, were quoted at 0.61% on Friday, up 23 basis points over the past month and compared with the 0.44% at which the 3-month Prague interbank offered rate (PRIBOR) fixed on Friday.

Signals from the economy have been positive, with a tight labour market, strong purchasing managers' surveys, and industrial output up 55.1% in April from a year ago when supply chains dried up due to global coronavirus restrictions.

Although headline inflation eased to 2.9% year-on-year in May, it was still near the top of the central bank's tolerance range of 1-3%, while core inflation, which strips items beyond monetary policy control, remained above 3%.