Czech central bank shocks with 75 basis-point interest rate increase

September 30, 2021

By Robert Muller and Jan Lopatka

PRAGUE (Reuters) -The Czech National Bank (CNB) raised its main rate by 75 basis points on Thursday, an even heftier policy tightening than markets and analysts had expected, delivering its biggest hike since 1997 as inflation soars.

The two-week repo rate stands at 1.50% after the hike, the highest level since March 2020 when the central bank slashed its rates to support an economy hit by the first wave of the COVID-19 pandemic.

In a Reuters poll, all eight analysts had expected a 50-basis point hike that several central bankers had flagged in public comments.

Governor Jiri Rusnok was due to comment on the decision at a news conference at 3:45 p.m. (1345 GMT), where he will also present the board’s assessment of risks to the central bank’s macroeconomic outlook.

The crown jumped by 0.5% after the announcement, and traded at 25.30 to the euro at 1300 GMT, just off its highest level since February 2020 hit earlier this month. Shorter-dated interest rate swaps climbed up to 5 basis points after the decision.

Several central bankers have been concerned about a rise in inflation expectations, and the country’s tight labour market as factors adding to global price pressures.

INFLATION JUMP

Inflation jumped to 4.1% in August, a full percentage point above a month-old central bank economic forecast.

The bank targets inflation at 2%, plus/minus 1 percentage point.

“The CNB’s inflation forecasts of 3.0% this year and 2.8% in 2022 will be difficult to achieve and Governor Rusnok is likely to strengthen the CNB’s hawkish tone in the post-meeting press conference,” Capital Economics said in a note.

“A further rise in inflation above 5% later this year now looks likely, and we think this points to further interest rate hikes at the next few policy meetings.”

Some economists had questioned the need for significant tightening, arguing that the elevated inflation was mainly driven by a global rise in energy prices and supply chain disruptions, factors beyond the central bank’s reach.

Meanwhile, the world’s top central bankers saw this situation not improving any time soon.

The decision is also a clear distancing from the government, which had been arguing the independent central bank should not hike rates, fearing monetary policy tightening might undermine the domestic economy’s recovery.

The Czech central bank is one of only two in the European Union to have started the tightening cycle, together with Hungary’s central bank. The latter slowed down its pace last week, however, when it raised its main rate by lower-than-expected 15 basis points.

(Reporting by Jan Lopatka and Robert Muller; Editing by Frances Kerry and Alex Richardson)

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