Europe poised for mass interest HIKE: Central Bank could raise rates after Czech bank acts

The Czech bank last cut its key interest rate in 2012 to 0.05 percent, the lowest since the country was formed in 1993 following the breakup of Czechoslovakia. 

But the rate cut is widely seen by policymakers as signalling the end to record low borrowing costs throughout Europe, the FT warns.

Central banks across Europe drove rates to record lows after the 2008 financial crisis, in a bid to prevent the threat of deflation.

However, analysts think that the European Central bank will soon loosen these policies.

At present, 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.

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

Yet, 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 European Central Bank, which has yet to make clear how it will end its asset purchases.

Mr Rusnok told a news conference: “The fact that the eurozone continues its massively relaxed policy is an issue we take into account.

“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.”

In the US, where the economy bounced back sooner, the Federal Reserve started to raise interest rates in 2015.

The European Central Bank may soon follow suit, as analysts expect interest rates to change, as strong economic growth, low unemployment, high house prices and a rise in wages fuels the economy.

Mr Rusnok confirmed at a news conference in Prague that another rate rise could be on the cards “in the future”. 

And, in the UK, analysts are keeping a watchful eye.

The Bank of England announced yesterday that rates in the UK would remain at a record low of 0.25 per cent. But the UK may not escape a rate rise altogether.

Governor Mark Carney warned households there could be a rate hike within a year if the current sluggish rate of growth remains modest.

He warned “prolonged low investment” could lead to an interest rate rise to steady inflation.

In The Czech Republic, the decision to raise rates was aimed at helping its struggling export-oriented economy.

Its economy had been booming recently with the lowest unemployment rate in the EU, while the inflation reached 2.3 per cent in June, above the bank’s long term target of two per cent.

However, while the Czech Republic does not use the common European euro currency, eurozone countries including Germany, are its major trading partners.