Czech interest rate hike, biggest in 24 years, aims to tackle rising inflation
The Czech National Bank has raised the key interest rate by 0.75 percentage points – the highest one-off rate increase in nearly a quarter century. The reason is rising inflation, exceeded 4 percent which in August. That’s twice the central bank’s target level of inflation.
Economists had expected the Czech National Bank board to raise the key interest rate – on which rates for mortgages and other commercial loans are based – but not quite by so much.
At their last meeting two months prior, the board raised rates by only 0.25 percentage points. Bank board minutes show four members backed that move, one sought a 0.5 percentage point rise, and two voted to leave rates unchanged.
This time around, five out of seven bank board members backed the 0.75 percentage point rise – the biggest since the year 1997 – lifting the two-week repo rate to 1.50 percent. Czech National Bank governor Jiří Rusnok announced the reasoning behind the move at a press conference on Thursday.
“This decision of the bank board is underpinned by the summer macroeconomic forecast and by analyses of information obtained since. Consistent with the forecast is a rise in market interest rates from mid-2021 onwards.
“The bank board assessed the risks and uncertainties of the summer forecast as being markedly pro-inflationary and hence requiring a faster rise in interest rates compared with the current forecast.”
In other words, prices should to continue to grow faster than the Czech National Bank is comfortable with. Above all, the cost of housing and reopened services – following the easing or anti-Covid restrictions – have risen. So too have the prices of goods, including food.
With the worst of the pandemic seemingly over, expectations have improved. At the same time, mortgage loans hit an all-time high volume. If that volume continues to grow quickly, the central bank will raise rates further. The market consensus is that the rate will reach 2 percent by year’s end.
Jiří Rusnok said the bank board expects that the increase in prices due to external shocks – i.e., the fallout from the Covid pandemic – will be of a temporary nature. But no-one knows how long the transition will take, and inflation is also rising due to how Czech companies and households react to developments.
“In addition, our labour market has been very tight for a long time – it was very tight before Covid, and the pandemic actually didn’t change that much. We’re returning to that quickly, perhaps even with greater intensity in some cases.
“Unlike Western Europe and the United States, already before Covid, roughly from 2019 on, we have had slightly higher inflation – above our target and at times even at the boundary of our tolerance…
“We concluded that we had to react, and to react in a decisive way, perhaps partly making up for not being as hawkish as we perhaps should have been.”
Central banker Jiří Rusnok added that the rise in key interest rates would not have been so significant if the Czech government’s budgetary policy had not been so expansive. The rate hike drew sharp criticism from Prime Minister Andrej Babiš – whose ANO party faces a parliamentary election on October 8-9 – for jeopardising the post-pandemic recovery.
