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Czech central bank lifts interest rates

The Czech central bank has raised interest rates for the first time since the financial crisis, becoming the first in the EU to start what analysts expect will be a gradual exit from a period of record low borrowing costs.

At its policy meeting on Thursday the Czech National Bank voted unanimously to lift its main policy rate from 0.05 per cent to 0.25 per cent — the first increase since 2008 and an attempt to dampen inflationary pressure from surging wages and soaring house prices.

Central banks across Europe have driven rates to record lows in a bid to ward off the threat of deflation and spark recovery, after economic growth slumped in the wake of the financial crisis.

The strong recovery in the bloc this year has reinforced expectations that the European Central Bank will soon start to prepare for the end of its own crisis-era policies and encouraged other policymakers to act to stop overheating in their own economies.

The ČNB was “the first really hawkish central bank in Europe”, said Luis Costa, an analyst at Citi. “This is the first central European bank to accept the reality of rising wage growth, closing of output gaps, and positive net export performance. The Czech National Bank’s mentality makes all the sense in the world to us.”

In the US, where economic recovery started earlier, the Federal Reserve started to raise interest rates late in 2015.

As the financial crisis unfolded, the ČNB cut its main policy rate from a peak of 3.75 per cent in 2008 to a record low of 0.05 per cent in late 2012. The following year it introduced a cap on the koruna against the euro in a bid to ward off deflation.

However it abandoned the cap in April amid rising inflation and strong economic growth, and analysts have since been expecting it to raise rates, as historically low levels of unemployment have helped drive a sustained rise in wages while house prices have also soared.

In June, the central bank warned that the risks posed by banks’ mortgage portfolios were “no longer purely hypothetical”, and said that it would increase banks’ counter-cyclical capital requirements from next year.

Speaking at a press conference in Prague, Jiří Rusnok, the ČNB’s governor, said the bank could raise rates further in future, but that this would depend on “the development of key indicators, not just inflation but others as well”.

Michal Skořepa, a macro analyst at Česká spořitelna, said he expected the ČNB to take a cautious approach. “I don’t think that they are in a [full-blown] tightening cycle yet — rather, they are carefully entering an era of slightly higher rates,” he said. “I think that they will watch how investors respond before deciding what to do next.”

Jaromir Sindel, an analyst at Citi in Prague, said that the next move by the ČNB would be influenced by the ECB, which is expected to decide later this year on how to exit its €60bn-a-month stimulus programme.

“Clearly what the ECB does about exiting its stimulus programme will be the decisive factor for central banks in central Europe. But the issue of rising wages and tight labour markets is a problem across the region,” Mr Sindel said.

In a statement the ČNB said it expected that growth “will accelerate visibly above 3 per cent” this year and stay slightly above that level in the following two years.

“Growth in domestic economic activity will be driven by robust growth in household consumption. This will continue to reflect optimism of consumers in an environment of ongoing employment growth, accelerating wages and low interest rates,” it said.

Thursday’s rate hike drove the koruna up 0.7 per cent to its highest level against the euro since 2013.

The ČNB’s move is the first significant rate hike in the EU since the Polish central bank raised rates in 2012. Denmark’s central bank cut rates to record lows in 2015 to ward off a speculative attack on its currency peg to the euro, before raising them slightly in early 2016.