The Strategist

The Czech Republic will be the first in the EU to raise rates

08/01/2017 - 13:57

This week, the Central Bank of the Czech Republic may launch a program of tightening monetary policy after 3 years of stimulation. 12 out of 22 economists surveyed by Bloomberg expect this event to be announced at a meeting on August 3.

Adam Jones
Adam Jones
Now the figure is at a record low level of 0.05%. Experts predict that the rate will increase immediately to 0.25%. At the same time, monetary regulators in the euro area cannot yet decide on such actions. They are waiting for more clear evidence of economic recovery in order to raise borrowing costs.

The level of inflation in European countries remains very low. However, the Czech Republic has finally managed to raise consumer prices. Inflation exceeded the target value of 2% due to a sharp jump in wages and the lowest unemployment in the European Union, which in June amounted to only 2.9%.

"The inflation rate in the Czech Republic has been higher than the target, and data on the labor market indicate that the economy is working above its potential. This is a standard signal for a more stringent monetary policy," said Radomír Jáč, chief economist for Central and Eastern Europe at Generali Investments in Prague. According to him, the Central Bank of the Czech Republic will "take small steps", raise interest rates with caution, making long pauses, at least until the moment when the rest of Europe does not follow suit.

Meanwhile, the assumptions that the Czech regulator will increase interest rates have increased circulation of Czech Koruna. The Czech national currency has risen in price by 3.7% against the euro since the beginning of April. These are the best results among the 31 leading currencies, followed by Bloomberg’s specialists.

At the end of June, Jiří Rusnok, Head of the Central Bank of the Czech Republic, announced that the country was ready to switch from koruna to euro. At the same time, he noted that before taking such a serious step it is necessary to reduce the difference between the incomes of Czech citizens and citizens of the euro area countries. However, the transition from koruna to euro in the Czech Republic has been discussed since 2004, when the country officially became an EU member.