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Looking Past Virus Chaos, Czechs Signal Rate Hikes Next Year

Inflation Binds Czechs After Fast Rate Cuts

With countries around the world pledging more monetary assistance for their virus-stricken economies, a record government spending spree and resilient inflation may allow the Czech central bank to raise borrowing costs as early as next year.

Having already cut its benchmark interest rate by a cumulative 2 percentage points between March and May, the fastest pace in the European Union, the bank left it at 0.25% on Thursday. Governor Jiri Rusnok said after the meeting that a change is “very unlikely” this year and he “can’t easily imagine” a hike before mid-2021.

“The central bank is in a fairly comfortable situation in that we definitely don’t face an acute need for further monetary-policy easing,” he said.

New forecasts published after the rate decision predict market rates -- a rough proxy for central bank policy -- gradually increasing from the middle of next year.

Looking Past Virus Chaos, Czechs Signal Rate Hikes Next Year

While the coronavirus continues to rattle economies worldwide, the Czech Republic is facing a rare spike in price growth. Despite a 10.7% drop in second-quarter output from a year earlier, government support is keeping the lid on unemployment.

An expected weakening of demand and a significant increase in the jobless rate will slow inflation to near the 2% target by the second half of next year, Rusnok said. The board didn’t discuss potential unconventional easing tools on Thursday, he said.

“It seems to me that the economic recovery won’t be easy because the shock has been very deep and unique,” Rusnok said.

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Worse-than-expected retail sales for June, the first month the economy almost fully emerged from a virus lockdown, show households remain uncertain. The country still has more job vacancies than unemployed, largely thanks to temporary government subsidies for workers’ salaries and state guarantees for cheap business loans.

The high degree of uncertainty surrounding the virus and the possibility that the koruna may be stronger than the central bank’s forecast means that not all economists see rate hikes as inevitable next year.

“The CNB can keep interest rates unchanged until the end of 2021,” said Radomir Jac, chief economist at Generali Investments CEE in Prague. “At the same time, it’s clear the board won’t hesitate to tighten monetary policy in 2021 if pressed by the situation in the economy, especially inflation trends.”

©2020 Bloomberg L.P.