Czechs Vow to Hike Rates Further After Boldest Move in 24 Years
The Czech central bank pledged to keep raising borrowing costs after lifting interest rates by the most in nearly a quarter century, pushing the koruna higher and angering the government with the European Union’s most aggressive anti-inflationary campaign.
Policy makers increased the benchmark rate by 75 basis points to 1.5% on Thursday, exceeding expectations for a half-point increase. The move followed a surge in consumer-price growth to the fastest in 13 years in August, which prompted fears that high inflation will become entrenched in the economy for longer than previously thought.
“We simply need to send a strong signal to people and the economy that we won’t allow inflation expectations to become detached from our target,” Governor Jiri Rusnok said. “We are aware how dangerous that would be and how high the cost would be trying to reverse it in the future.”
Rusnok said the debate from now on will be about the size and frequency of future rate hikes. The next forecast, due in November, will probably show quickening inflation for the coming quarters and will be key for the pace of future monetary tightening.
While the global surge in the cost of energy and materials could be transitory, Czech inflation has run above target for almost three years. The Czech economy is quickly returning to pre-pandemic levels and the labor market -- fueled by the EU’s lowest unemployment rate -- is showing fresh signs of overheating, according to the governor.
The koruna jumped 0.8% to 25.305 per euro on Thursday, the biggest gain in six months.
The larger-than-expected rate increase is a departure from traditional quarter-point increases the bank has deployed since it started targeting inflation in 1998. The September move propelled the cumulative size of Czech tightening past Hungary, whose central bank had previously been the EU’s leader in raising interest rates this year.
By comparison, Poland has stayed on the sidelines, rejecting a motion to hike by 190 basis points this month.
The rising 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. Following Thursday’s decision, Finance Minister Alena Schillerova blasted the tightening campaign, pointing to supply-chain bottlenecks as the cause of inflation.
“Today’s decision by the CNB has put the economic policy on a track typical for developing countries,” she said on Twitter. “While central banks in the developed world are supporting growth and living standards, our central bank has chosen the path of making loans for companies and mortgages for families more expensive.”
The central bank has rebuffed the criticism. It says the law forbids board members from accepting instructions from anyone when fulfilling their mandate of safeguarding price stability. Rusnok said the bank must react to domestic price risks.
“Nobody knows exactly how long the transitory nature of inflation pressures will last,” Rusnok said. “Our inflation isn’t driven only by external drivers, but also by the way companies and households at home are already reacting to this development.”
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