Czechs Set to Raise Rates the Most in 24 Years: Decision Guide

(Bloomberg) -- Sign up for the New Economy Daily newsletter, follow us @economics and subscribe to our podcast.

The Czech central bank is poised to take the most hawkish line on interest rates in the European Union, adding to the government’s pre-election headaches after a spike in inflation stoked new urgency.

Following two quarter-point hikes this summer, the Czech National Bank is expected to raise its benchmark rate by half a point to 1.25% on Thursday, according to all 16 economists surveyed by Bloomberg. That would be the biggest increase since 1997 and overtake this year’s EU-leader in monetary tightening, Hungary.

Since data showed that consumer prices jumped the most in 13 years in August, four of the central bank’s seven rate-setting board members have said they’re either convinced that a half-point hike is needed this month or signaled that they may back such a move.

“There is a risk of growing inflation expectations,” said David Vagenknecht, an analyst at the Czech unit of Raiffeisen Bank International AG. “The CNB will want to prevent that from happening by sending a clear hawkish signal.”

While the global surge in the cost of energy and materials could be transitory, Czech inflation has run above the target for almost three years, as a shortage of workers drives up wages and consumption.

Read More: Czechs Selling Bonds as Rate Hawks Drive Yields Up

The surging costs of homes, restaurant meals and services have dominated economic debates and media in a country where consumers traditionally rely on savings rather than debt. With general elections scheduled for next week, opposition parties are blaming billionaire Prime Minister Andrej Babis, saying generous stimulus programs have been fiscally irresponsible and fanned inflation.

Despite that criticism, the administration has put unprecedented pressure on the central bank to avoid rate hikes that are driving up borrowing costs for both the state and private businesses. Earlier this month, Governor Jiri Rusnok rebuffed those attempts, saying the law forbids board members from accepting instructions from anyone when fulfilling their mandate of safeguarding price stability.

Bank of America Corp. economists expect the key Czech rate to rise to 2% this year and 3% by the end of 2022, or more than investors are betting on money markets. By comparison, Hungary slowed its rate-hike campaign last week, raising borrowing costs less than expected as the government ramps up spending before next year’s elections.

Read More: Rapid Rate Hikes Seen Boosting Czech Koruna’s Appeal

Elevated global prices are unlikely to abate soon, while the country’s “overheating labor market” could keep driving rapid wage growth, BofA economists Mai Doan and David Hauner wrote in a report to clients.

“The economy is facing a double whammy of cost-push and demand-pull pressures,” they said. “A strong response from the CNB is thus needed.”

©2021 Bloomberg L.P.