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Czechs aim to nip price growth expectations in the bud with biggest rate hike in 24 years

Czechs aim to nip price growth expectations in the bud with biggest rate hike in 24 years
© Reuters. FILE PHOTO: The Czech National Bank is seen in central Prague, Czech Republic, August 3, 2017. REUTERS/David W Cerny

By Robert Muller and Jan Lopatka

PRAGUE (Reuters) -The Czech National Bank (CNB) shocked the market on Thursday with its biggest interest rate hike since 1997 and said more would come as it aimed to prevent people and firms from getting used to inflation overshooting the central bank’s 2% target.

The 75 basis-point rate increase comes as other central banks around Europe slow the pace of monetary tightening or keep policy loose by looking past a fast rise in inflation that has come amid a global post-pandemic recovery.

The hike was larger than the already big 50-basis point move that markets had priced in and lifted the bank’s two-week repo rate to 1.50%.

The crown jumped 0.9% against the euro before giving up some of the gains.

The central bank’s move drew unusually sharp criticism from Prime Minister Andrej Babis and Finance Minister Alena Schillerova – whose ANO party faces an election on Oct. 8-9 – for jeopardising recovery.

Like most countries, the Czech Republic is facing global supply snags and growing transport and energy costs, along with strong demand after coronavirus pandemic restrictions eased earlier this year, which are all pushing up prices.

But it also has the European Union’s lowest unemployment and a tightening labour market pushing up wages, as well as a bubbling real estate market and growth in prices like services, and large budget deficits.

Central bank Governor Jiri Rusnok said after the board’s 5-2 vote for the hike that there were already signals of inflation expectations rising.

“We need to get a strong signal into society and the economy that we will not be resigned to inflation expectations putting down roots somewhere far from our target,” Rusnok said.

“We are aware how dangerous that is, how expensive our future efforts to bring expectations back to our inflation target would be.”

He said rates would rise further as they were still far below pre-pandemic levels as well as the neutral level for rates that the bank sees at around 3%, while economic growth at 4.1% next year may be above the economy’s balanced rate.

The pace will depend on further developments and the bank’s new outlook due in November, he said.

The finance minister criticised the move on Twitter (NYSE:TWTR), saying it put the country on the “same track typical of developing nations”, while developed world central banks were supporting growth.

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So far Hungary is the only other European Union nation that has started tightening, but it slowed its pace last week, with its base rate 15 basis points higher than the Czech rate. Poland’s central bank has resisted any rush to tighten, wary of thwarting an economic rebound.

Headline inflation jumped in August to a 13-year high at 4.1%, more than a percentage point above the bank’s tolerance band around its target.

Jiri Polansky, a Ceska Sporitelna analyst, said the main rate could end 2021 at 2.00% and rise a touch further next year.

“But this will depend very strongly on the crown’s exchange rate, whose potential firming could take away form the intensity of rate increases,” he said.

Source: Investing.com

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