March 5, 2019 / 8:17 AM / 4 months ago

Czech central banker Holub sees 1-2 rate hikes as most likely in 2019

PRAGUE, March 5 (Reuters) - The Czech National Bank may raise interest rates once or twice this year, although a disorderly Brexit may postpone the next move, board member Tomas Holub said.

In an interview, Holub also said policy tightening remained a possibility at the next bank board meeting on March 28.

The central bank raised its main two-week repo rate in five steps to 1.75 percent last year before pausing at its two meetings in December and February.

When asked whether he did not rule out a rate increase in March, Holub told Reuters: “That is correct ... Overall, data from the domestic economy seem to me to be slightly supporting a further rise of interest rates.”

After the February meeting, the bank said it was open to one or two increases this year if external pressures waned, the domestic economy kept growing and the crown remained weaker than forecast.

“I see zero to two (hikes this year). I don’t rule out the zero as such, but I don’t see it much likely. We are still in the process of normalising monetary policy,” Holub said on Monday.

“Personally, I see one to two rate hikes as the most likely options during this year,” he said, pointing to inflationary pressures stemming from the domestic economy, especially from household consumption pushing prices higher as wages rise.

The seven-member board next meets on policy just one day ahead of the planned date of Britain’s leaving the European Union, March 29. Holub agreed with the central bank and some of his fellow rate-setters that a no-deal Brexit could influence their decision.

“If we saw that there was a disorderly Brexit coming the day after our meeting, then given the level of uncertainty, that would rather be a factor for delaying the decision until May at least, when we will have a full-fledged forecast which could properly include Brexit,” Holub said.

The central bank estimates that a no-deal Brexit could cut Czech economic growth - which it expects at around 3 percent this year and next - by 1.4 percentage points.

The crown exchange rate is another important factor in deciding on interest rates. The central bank had predicted the crown would strengthen faster than the currency did in recent quarters, prompting suggestions that the bank might want to adjust its model.

Holub, who had been in charge of the bank’s forecast unit for 15 years, said that a change is being prepared to be ready in the middle of this year.

“We will have an alternative scenario containing this model in May and I assume that it will confirm what we have seen in our internal, shadow outlooks — that it will suggest a slower pace of the crown’s nominal exchange rate appreciation,” Holub said.

“That does not have to mean automatically a faster raising of interest rates,” he said. (Reporting by Robert Muller, editing by Larry King)

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