Czechs Raise Rates to Highest in EU in One Last Big Hike

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The Czech central bank raised borrowing costs to the highest level in the European Union, delivering what's probably its last large increase and outlining a relatively dovish outlook for the rest of the year. The koruna weakened.

Policy makers raised the benchmark rate to 4.5% from 3.75% on Thursday, as predicted by a majority of economists in a Bloomberg survey. The move brought the cumulative rate hikes made since June to 4.25 percentage points, the boldest policy moves since the country began targeting inflation in 1998.

Governor Jiri Rusnok said the central bank has “no ceiling” for rates, although more large hikes may not be needed if the economy develops as expected. Borrowing costs may still rise further given the persistent significant risks and uncertainties, including monetary tightening abroad, a potential escalation of tensions between Russia and Ukraine and global supply chains.

“We perceive moderate inflationary risks to the forecast, which means that there is some probability that the situation will unfortunately require additional tightening steps,” Rusnok said. “But any predictions now would be pure speculation -- we live in enormous uncertainty.”

After his comments, the koruna weakened as much as 0.7% to the euro, reversing a 0.4% gain earlier that day. The yield on 5-year government bonds slid 5 basis points to 3.52%.

The Czechs, along with Hungary, were the EU's first central banks to start hiking rates last year. Other countries in the region, including Poland and Romania, have been tightening monetary policy at a slower pace.

With the lowest jobless rate in the EU, a key goal of the Czech tightening drive is to make sure workers and businesses don't perceive currently elevated inflation as a long-term phenomenon during wage negotiations.

The central bank's fresh forecast sees average consumer price growth of 8.5% this year, compared with the previous projection of 5.6%. While part of the increase is due to supply problems and rising energy costs, policy makers also need to rein in pressure from a shortage of workers and an overheating real-estate market.

The central bank also sees slower economic growth this year and next, and the new prognosis signaled interest rates should should gradually decline in the second half of 2022.

The bank's communications suggest that rates are already close to their peak, and any further increases should be only fine-tuning, according to Radomir Jac, chief economist at Generali Investments CEE in Prague.

“It appears that rates have already gone most of the path up, and the next big theme could be their gradual reduction starting in the second half of this year,” he said.