UPDATE 1-Czechs hike rates by 25 bps to tame inflation

30.08.2007 | , Reuters
Zpravodajství ČTK


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The Czech central bank (CNB) raised key interest rates by a quarter of a percentage point on Thursday in the third such move this year to prevent inflation from rearing its head in the strong central European economy.

The CNB's policymakers boosted the key two-week repo rate to 3.25 percent, its highest level in five years, on the heels of a 25 basis point hike in July.

The sixth quarter-point rate rise since credit costs bottomed out at an all-time low of 1.75 percent in October 2005 followed a similar step by neighbouring Poland on Wednesday.

The CNB scheduled a news conference for 3:30 p.m. (1330 GMT) to elaborate on the decision, which left the main Czech rate at the lowest level in the European Union but narrowed the discount versus the higher euro zone equivalent to 75 basis points.

Policymakers have signalled tighter policy is needed to counter a projected rise in inflation above the 4 percent upper limit of their comfort zone next year, spurred by 6 percent economic growth, tax hikes and increases in regulated prices.

However, financial markets had been unsure about the outcome of Thursday's meeting, with nine of the 16 CNB watchers surveyed by Reuters last week predicting no rate change against seven forecasting a quarter-point rise [CNB/INT].

A 180-degree turn in global economists' assessment of risks to the world's economy after a credit and liquidity squeeze in major markets had coupled with weaker domestic data to sap previous investors' conviction that a rate hike was imminent.

The crown has rallied 1.3 percent to near all-time highs to the euro since the start of this month, tightening monetary conditions, as fears of a global credit crunch led investors to buy back crowns they sold to fund risky carry trades.

The crown inched up to erase part of early losses to trade at 27.650 per euro after the rate hike announcement from 27.685 before, firmer from levels around 28.00-28.20 on which the CNB's staff has based its inflation projections.

"For me, it is unexpected, it is two months in a row. This will support the crown in further firming," said Petr Dufek, analyst at bank CSOB in Prague.

Bond yields and forward money market rates rose by up to seven basis points.

[PRAGUE/Reuters/Finance.cz]

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