A woman walks past a Russian shop on March 29, 2022 in Karlovy Vary, Czech Republic. - (Photo by Michal Cizek / AFP)
LONDON: The Czech central bank has hiked interest rates to a two-decade high and signalled it will raise them further, as soaring inflation overshadows risks to the economy from the war in Ukraine.
Policy makers raised the key rate by a half-point to 5% on Thursday, bringing the cumulative increases to 475 basis points (bps) since June.
The decision matched the median forecast in a Bloomberg survey and followed a series of even bigger hikes in the previous four meetings.
The Czechs have been battling resilient price pressures caused by pandemic lockdowns, supply-chain disruptions and overheating domestic labour and property markets.
With Russia’s invasion of Ukraine further boosting global commodity and energy costs, the central bank expects consumer price growth to accelerate to around 13% to 14% this summer, from 11.1% in February.
Governor Jiri Rusnok said the board also debated the option of raising rates by 75bps, but agreed to wait for more data and its next quarterly forecast.
While the war in Ukraine is a threat to economic activity, the bank is primarily reacting to a further increase in domestic inflation pressures, according to the governor.
“Restoring price stability quickly is now an absolute priority,” Rusnok told reporters. The koruna gained 0.3% to the euro after Rusnok’s comments.
Before the war, Czech central bankers signalled they were almost done with tightening and might start cutting rates around the end of this year. Like many of their peers, they’re now facing the dilemma of tackling inflation without undercutting economic growth.
Surging costs of everything from commodities to payrolls and a shortage of chips are hurting Czech businesses, including the key car industry. In addition, falling real wages may eventually curb private consumption.
The central bank said intensifying price pressures will require much tighter monetary policy and for a longer time than assumed in its February forecast.
“The bank board is monitoring current developments and it is ready to continue raising interest rates to prevent inflation expectations from deviating from the 2% target in the longer term,” Rusnok said. — Bloomberg
