Czech central bank raises rates by bigger-than-expected 75 bps to 5.75%

© Reuters. FILE PHOTO: The Czech National Bank is seen in central Prague, Czech Republic, August 3, 2017. REUTERS/David W Cerny

PRAGUE (Reuters) -The Czech central bank raised its main interest rate by 75 basis points on Thursday to 5.75%, the highest point since 1999, as inflation soared on global price shocks combined with a tight domestic labour market.

The hike was bigger than unanimous market expectation of 50 basis-point increase. The bank has been tightening policy since last June, raising borrowing costs by 550 basis points.

Policymakers believe that the main repo rate may be near or at peak as inflation is expected to fall significantly next year, the horizon where the bank sees its current rate decisions having full effect.

Shocks from the war in Ukraine and soaring inflation, at 12.7% year-on-year in March, have also dented confidence and made analysts predict an economic slowdown.

The bank's board based its decision on a new quarterly economic forecast, due to be released at 3.45 p.m. (1345 GMT), when Governor Jiri Rusnok will hold a news conference.

The forecast is expected to cut the growth outlook for this year from the current 3%, and raise this year's inflation outlook from 8.5%.

"As things stand, we expect one more interest rate hike at its next meeting in June (to 6.25%) and to keep rates on hold at this high level for longer than most expect," said Joseph Marlow of Capital Economics in a note.

The crown firmed after the announcement to 24.576 to the euro from 24.637.

Elsewhere in Europe, the Bank of England raised its key rate by 25 basis points on Thursday, and the Polish central bank was expected to tighten policy by 100 basis points to 5.5%.

BOARD CHANGES TO AFFECT FUTURE STEPS

The meeting was the penultimate policy decision before Rusnok's final term on the board ends at the end of June, along with the first terms of Vice-Governor Tomas Nidetzky and board member Vojtech Benda.

The three have been a solid part of the majority on the seven-member board that backed the bank's tightening cycle.

President Milos Zeman has not announced his choice for the new governor, but said last week he had four candidates and had a "more or less" clear idea which one to choose.

Zeman met potential candidates Nidetzky and the other Vice-Governor Marek Mora last week, and board member Ales Michl, an opponent of rate increases, on Wednesday.

Another candidate mentioned in local media is head of the country's chamber of commerce, Vladimir Dlouhy, who has also suggested higher tolerance for inflation given supply-side shocks.