BUDAPEST/PRAGUE: The Czech crown firmed on Wednesday, leading moderate currency gains in Central Europe, after June inflation figures fuelled expectations that the Czech central bank will soon hike interest rates for the first time in almost a decade.
The Czech National Bank (CNB) is the only one in the region to have shifted to a hawkish policy stance, starting in April when it ended its policy of capping the crown at 27 versus the euro to let the currency strengthen.
It has also factored into its economic forecasts interest
rate hikes in the third quarter of the year.
Economic growth has picked up to around 3-4 percent in Central European states, but a rise in inflation which began last year lost steam in recent months.
Data released on Wednesday showed a drop in Czech annual inflation to 2.3 percent in June from 2.4 percent in May, the the result of lower fuel inflation.
But a continuing rise in core inflation to 2.6 percent provides the CNB with sufficient argument to lift rates as early as its next meeting on Aug. 3, Capital Economics analyst Liam Carson said in a note.
The crown firmed, approaching its strongest levels since the exit from the cap, attained last week at 26.048. But it was unable to break below the 26.1 line, and at 1113 GMT it traded at 26.114, up 0.1 percent.
Analysts remained split over the rate outlook.
KBC analysts said in a note that the CNB faced a dilemma as headline inflation was above its 2 percent target but below its projection, and may decrease further in the next months.
"The case (of) a rate hike in the third quarter, which had been advocated by some Board members and still assumes the central bank projection, is not as clear as it looks," they said.
The CNB said the inflation figures represented "a slight anti-inflationary risk" to its forecasts.
Gains in most Central European currencies were small as investors awaited more clues about global interest rate trends from Federal Reserve chair Janet Yellen's testimony to the US Congress starting on Wednesday.
The dinar, however, extended its recent gains and hit 21-month highs against the euro on the firmer side of the psychological 120 line.
The Serbian central bank, which kept the region's highest benchmark rate on hold at 4 percent on Monday, continued to intervene in the market against the currency despite an uptick in annual inflation to 3.6 percent.
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