Czech central bank raises key interest rate by the most since 1997

Published: 15.11.2021 Related countries:  Czech Republic Czech Republic

Czech National Bank raised key interest rates by 1.25pp, biggest hike in 24 years, because of high inflation pressures.

The Czech National Bank stunned markets again on Thursday, the 4th of November by lifting its main interest rate by 125 basis points, delivering its biggest hike in over two decades to rein in soaring inflation and signalling borrowing costs had more room to rise. The hike, the bank’s largest since 1997, was a sharper move than analysts and markets had expected and nearly doubled the key two-week repo rate to 2.75%, putting it at its highest level since the 2008 global financial crisis hit. Rates are now higher than before the coronavirus pandemic struck in early 2020.

The speed in policy tightening also shows how strongly central banks around the European Union’s emerging east have had to react to sharp prices growth driven by global supply snags as well as strong domestic labour markets. Czech central bank Governor Jiri Rusnok told a news conference after the hike that the majority of the board members wanted to give a clear message it would not tolerate higher inflation expectations.

“Certainly we will discuss raising rates at further meetings,” he said.“We are not going to accept ... that expectations would take root here that inflation will not be around the 2 percent (inflation target) but perhaps double that. We cannot allow something like that.”

Analysts in a Reuters poll had expected at most a 75-basis-point hike on Thursday and a total of 125 basis points in hikes by the end of the year.

Rusnok said following moves would likely be smaller after such a sharp increase, which carried out a large part of the rise in interest rates seen in the bank’s new staff forecasts.

The new outlook indicated rising interest rates at the end of this year and start of next year. It also showed higher inflation this year and next - with an average rate of 5.6% seen in 2022, raised from a previous forecast of 2.8% - along with slower growth, as supply disruptions like a shortage of semiconductors for car production hit the economy.

Czech inflation jumped to 4.9% year-on-year in September, and Rusnok said a spike toward 7% in the winter months was expected.The jump in prices has been fuelled also by rising energy costs because of soaring European prices that will filter through to households in the coming months.

The Czech crown initially jumped after the decision but settled and was up 0.6% on the day at 25.3750 to the euro. Rates markets leapt as a 1-year interest rate swap climbed more than 20 basis points.

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Source: Reuters