BUDAPEST/PRAGUE: The crown surged on Thursday after the Czech central bank (CNB) delivered the the European Union's first central bank interest rate hike for more than five years to fight inflation.
The 20 basis point hike in the two-week repo rate to 0.25 percent had not been expected by half of the analysts in a Reuters poll, and had not been priced in by markets, .
It was the first Czech rate rise since 2008.
The crown touched 25.9 against the euro, its strongest level since April when the CNB abandoned a cap which had kept the crown weaker than 27 since late 2013. It traded at 25.965 by 1139 GMT, up half a percent.
Czech interest rates swaps (IRSs) ticked up around 5 basis points, short-end forward rate agreements rose 10 basis points and bond bid/ask spreads widened, but few deals were struck.
The stocks of lenders Erste and Komercni Banka extended their gains after the decision, leading a 0.4 percent rise in the Prague bourse's main stock index.
The crown, which weakened to a one-month low of 26.172 earlier this week, traded at the levels where analysts in a Reuters poll projected it to be at the end of this month.
The poll predicted a gradual strenghtening to 25.5 in the next 12 months, and projected stronger than expected courses for the region's main currencies, with Europe's economic growth powering ahead.
The Czech economy is also picking up.
With inflation running at 2.3 percent in June, above the 2 percent midpoint of the target range, the CNB had become the first central bank in the region which indicated that rate tightening could come soon.
Sceptics had said that the crown firmed a good clip since being set free in April, and its strengthening had tightened monetary conditions enough. The CNB was also uncertain over how soon the European Central Bank will drop its own ultra-loose policy of bond purchases.
"Future (CNB) decisions will be highly dependent on the inflation path and the state of the economy, which has recently been feared to be overheating," said Natalia Kornela Setlak, analyst of Nordea in a note.
Romania's central bank is unlikely to follow the example of the Czech hike at its meeting on Friday, according to another Reuters poll. None of the region's central banks are seen lifting rates this year.
Elsewhere, the government bonds of Hungary, which have much higher yields than Czechs, drew strong demand at two auctions on Thursday.
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