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

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PRAGUE (Businesshala) – The Czech National Bank (CNB) stunned the market on Thursday with its biggest interest rate hike since 1997, saying it aimed to help people and firms get used to inflation exceeding the central bank’s 2% target. have to be stopped from happening. .

FILE PHOTO: The Czech National Bank is seen in Central Prague, Czech Republic on August 3, 2017. Businesshala/David W. Cerny

The 75 basis-point increase comes as other central banks around Europe slow the pace of monetary tightening or keep policy lax amid a rapid rise in inflation amid a recovery from the global pandemic. Is.

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

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

The central bank’s move drew unusually sharp criticism from Prime Minister Lady Babis and Finance Minister Elena Shilarova – whose ANO party is facing elections on October 8-9 – for jeopardizing the recovery.

Like most countries, the Czech Republic is facing a reduction in global supply and rising transportation and energy costs, along with strong demand after the easing of the coronavirus pandemic restrictions earlier this year, all of which are driving up prices. Huh.

But it also has some of the EU’s lowest unemployment and a tight labor market that is pushing up wages, as well as a bubble real estate market and increased prices for 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 signs of rising inflation expectations.

“We need to get a strong signal in society and the economy that we will not resign to inflationary expectations, which are far from our target,” Rusnok said.

“We know how dangerous this is, how costly our future efforts to put expectations back on our inflation target will be.”

He added that rates would rise further as they were still below pre-pandemic levels as well as neutral levels for rates, which the bank sees around 3%, while economic growth of 4.1% next year is expected to keep the economy balanced. rate may be higher.

He said the pace would depend on further developments and the bank’s new outlook in November.

The finance minister criticized the move on Twitter, saying it put the country “on the same track as developing countries”, while developed world central banks were supporting development.

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So far Hungary is the only other EU nation to have begun tightening, but slowed down 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 hit a 13-year high of 4.1% in August, one percentage point above the bank’s tolerance band around its target.

Cesca Sporitelna analyst Jiri Polanski said the key rate could end 2021 at 2.00% and rise a touch further next year.

“But this will depend very strongly on the Taj’s exchange rate, the potential strength of which could outweigh the intensity of the rate increase,” he said.

Reporting by Jan Lopatka and Robert Mueller; Written by Jason Howett; Editing by Francis Carey and Alex Richardson

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