Czech National Bank Raises Key Policy Rate After Nearly a Decade -- Update

By Brian Blackstone Features Dow Jones Newswires

The Czech central bank raised its key policy rate Thursday for the first time in nearly a decade, a milestone for Europe's central banks that have taken dramatic easing steps in recent years to prop up their economies and keep their currencies from strengthening too much.

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The Czech National Bank raised its two-week repo rate to 0.25% from 0.05%, the bank said, the first significant rate increase by a European Union central bank in recent years. It had been at 0.05% since November 2012. The bank last raised rates in February 2008. It raised the Lombard rate by 25 basis points to 0.5% and held the discount rate unchanged at 0.05%.

Like other central banks outside the eurozone, the Czechs have struggled in recent years with a strong currency as investors sought safety amid radical easing steps taken by the European Central Bank that included negative interest rates and a large bond-buying program.

In addition to cutting rates to near zero five years ago, the Czech central bank installed a peg to its currency, the koruna, of 27 to the euro in 2013. It accumulated tens of billions of euros by intervening to keep the koruna from strengthening beyond the peg.

It dropped the peg in April after signaling for months that it was planning to do so, and while the koruna has strengthened since, it hasn't by very much. The euro weakened against the Czech currency following Thursday's decision, fetching 25.9 koruna, down 0.7% from Wednesday.

Other, non-euro, central banks in Switzerland, Denmark and Sweden have also scrambled to shield their economies from the ripples emanating from the ECB.

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The Swiss National Bank had a ceiling on the franc's value against the euro from September 2011 until January 2015 and slashed its deposit rate to -0.75% 2 1/2 years ago, where it remains. It has also intervened heavily to weaken the franc, accumulating $750 billion worth of foreign currency investments along the way.

Expectations in financial markets that the ECB will signal, as soon as September, plans to unwind its quantitative easing program appeared to have given the Czechs greater leeway to tighten policy. The euro has strengthened considerably in recent weeks as investors bet on less expansive monetary policy in the eurozone.

Analysts don't expect the Swiss to follow the Czech path by raising interest rates in advance of the ECB, suggesting the SNB's deposit rate will remain at -0.75% well into next year at least.

The Danish central bank raised its deposit rate slightly in early 2016 but it remains deeply negative at -0.65%.

Last month, Sweden's Riksbank held its repo rate at -0.5% and said it doesn't expect to start raising rates until the middle of next year.

Write to Brian Blackstone at brian.blackstone@wsj.com

(END) Dow Jones Newswires

August 03, 2017 08:05 ET (12:05 GMT)