UPDATE 4-An about-face after nine years: Czechs lift interest rates

PRAGUE - 3 August 2017: Czech policymakers delivered their first interest rate hike since 2008 on Thursday, stepping ahead of European Union peers to launch the bloc's first tightening cycle in more than five years.

Reflecting global rate-setters' desire to move away from post-financial crisis ultra-loose monetary policy, the Czech National Bank (CNB) board voted unanimously to lift its key two-week repo rate by 20 basis points to 0.25 percent.

The rise -- the first major hike in the EU since Poland last lifted rates in 2012 -- came faster than most had originally expected when the Czechs took an initial step to normalising policy in April by abandoning a long-held cap on the crown currency.

It also comes as the European Central Bank remains locked into its ultra-loose policy of buying bonds from markets, a factor that many analysts had thought would hold the Czechs' hand for the time being to keep pressure off the crown currency.

Governor Jiri Rusnok said domestic growth, inflation and a tight labour market led the decision.

But he cautioned the bank had not made any conclusions on the timing of next steps and that the return to normal rate levels would take time, slowed by the policy of the ECB, which has yet to make clear how it will end its asset purchases.

"The fact that the euro zone continues its massively relaxed policy is an issue we take into account," Rusnok told a news conference.

"But we are finding enough domestic reasons to decouple our rates from zero and start a process, hopefully, of a gradual normalisation of monetary conditions through not just the strengthening of the crown... but also through the gradual rise in interest rates."

The crown strengthened as much as 0.8 percent to 25.90 to the euro after the decision, its highest since the central bank ended its currency cap at around 27 per euro. It later traded just above 26.

Markets had been split on rates, with forward rate agreements giving almost no chance to a move this week.

After the decision, short-term forwad rate agreements corrected up 10 basis points while the interest rate swap curve rose about 5 basis points.

Economy Aiming High

The central bank raised its forecasts for economic growth this year by a hefty 0.7 percentage points to 3.6 percent and estimated growth would stay above 3 percent in 2018 and 2019.

The Czechs have the EU's lowest unemployment at 2.9 percent under Eurostat methodology, pushing wages up sharply. Housing prices, too, have soared, fuelled by short supply and hot lending at record low rates.

Rusnok said these factors warranted leaping ahead of other European central bankers like in the euro zone and Britain, who still face uncertainty over growth and inflation.

"We have dramatically better employment... This is not the case in western Europe. The situation is dramatically different," Rusnok said.

"Wages here are rising markedly. We have the highest growth in real estate prices, we cannot leave that aside."

Inflation, however, will dip back just under the 2 percent target next year, from 2.3 percent in June, the bank said, limiting the room for more tightening.

Analysts said despite the bank's first step, the new outlook was more dovish than before, seeing fewer rate hikes next year.

"The CNB cannot go significantly against the ECB as it would... widen the interest rate differential, which would attract more foreign capital and lead to a firming of the crown," Ceska Sporitelna analyst Jiri Polansky said.

"That would in turn be reflected in lower price growth and ecnomic activity. In our view, the next interest rate rise will come in the second to third quarter next year."