Czechs Hike Rates to Two-Decade High And Signal More Is to Come

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The Czech central bank hiked interest rates to a two-decade high and signaled it will raise them further as soaring inflation overshadows risks to the economy from the war in Ukraine.

Policy makers raised the key rate by a half-point to 5% on Thursday, bringing the cumulative increases to 475 basis points since June. The decision matched the median forecast in a Bloomberg survey and followed a series of even bigger hikes in the previous four meetings.

The Czechs have been battling resilient price pressures caused by pandemic lockdowns, supply-chain disruptions and overheating domestic labor and property markets. With Russia's invasion of Ukraine further boosting global commodity and energy costs, the central bank expects consumer price growth to accelerate to around 13%-14% this summer, from 11.1% in February. 

Governor Jiri Rusnok said the board also debated the option of raising rates by 75 basis points but agreed to wait for more data and its next quarterly forecast. While the war in Ukraine is a threat to economic activity, the bank is primarily reacting to a further increase in domestic inflation pressures, according to the governor.  

“Restoring price stability quickly is now an absolute priority,” Rusnok told reporters.

The koruna gained 0.3% to the euro after Rusnok's comments. 

Before the war, Czech central bankers signaled they were almost done with tightening and might start cutting rates around the end of this year. Like many of their peers, they're now facing the dilemma of tackling inflation without undercutting economic growth.

Surging costs of everything from commodities to payrolls and a shortage of chips are hurting Czech businesses, including the key car industry. In addition, falling real wages may eventually curb private consumption.

The central bank said intensifying price pressures will require much tighter monetary policy and for a longer time than assumed in its February forecast.

“The bank board is closely monitoring current developments and it is ready to continue raising interest rates to prevent inflation expectations from deviating from the 2% target in the longer term,” Rusnok said.

The bank board didn't have a very detailed debate about the possibility of selling some of its vast foreign reserves to strengthen the koruna as an additional tool to fight inflation, according to the governor. 

While using the currency isn't “taboo” in extraordinary situations, rates remain the preferred instrument, he said. 

“We still have room to use our standard tool, which is interest rates,” said Rusnok.

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