Czech central bank lifts rates for second time, downplays prospect of hiking cycle

By Jan Lopatka and Jason Hovet

PRAGUE, Nov 5 (Reuters) - The Czech National Bank (CNB) raised interest rates for the second time this year in a narrow vote on Thursday to rein in core inflation and energy-driven price pressures, but said the move did not start a tightening cycle.

The CNB board voted 4-3 to increase its main two-week repo rate CZCBIR=ECI by 25 basis points, to 4.00%, in line with expectations in a Reuters poll. Dissenters voted to keep the rate steady.

Governor Ales Michl said the bank acted to anchor inflation expectations and prevent the secondary impacts of high energy prices.

"The debate was about whether the current strict monetary policy is sufficient or whether we would tighten it slightly more," Michl told a news conference.

"It was only about fine-tuning of monetary policy restriction. We agreed that there is no beginning of a new cycle of policy tightening."

At the same time, Michl said the board's debate reflected that policy was already restrictive going into the global energy price shock this year, and long-term market rates were also making financial conditions tight.

"We will approach the next step very carefully, very deliberately, we will certainly leave some time to evaluate our efforts to date," he said.

"I cannot say more about the future, we are keeping all options open."

Thursday's move followed a pause after the bank first hiked rates in June, and the CNB is the only one among its peers in Central Europe this year to tighten policy amid price pressures caused by the Middle East conflict.

INFLATION SPIKE NEXT YEAR

The crown hit a two-week high of 24.259 against the euro on Thursday, but was down on the day at 24.325 later in the session as a rebound in oil prices hit Central Europe's currencies.

The Czech economy, like others, is facing risks from the continuing US-Iran war in the Middle East, which has disrupted oil and energy markets — fuelling inflation and becoming a risk for economic growth at the same time.

While inflation — at 2.4% in October, according to preliminary data — has stayed within the bank's tolerance band around its 2% target, still persistent service price growth and core inflation, along with wage growth and strong private and public lending, have been adding to price pressures.

The bank's forecasts sharply raised the 2027 inflation outlook to above 3%, the upper limit of the tolerance range.

In a Reuters poll last week, the median forecast saw the repo rate flat after Thursday's expected hike until the third quarter of 2027. Market pricing is betting on more tightening.

Analysts said rates have likely peaked, unless repricing activity at the start of next year, when many companies adjust their prices, is high.

"If January inflation surprises significantly to the upside and comes in well above expectations, the CNB could deliver one or two additional rate hikes," Erste Group Bank said, viewing that as an alternative scenario to its outlook of stable rates.