- Largest increase since 1997, stronger than expected 50 basis points
- The bank worries about inflation expectations
- Says the price pressures are also coming from the national economy
PRAGUE, Sept. 30 (Reuters) – The Czech National Bank (CNB) shocked the market on Thursday with its biggest interest rate hike since 1997 and said more would come as it aimed to shut out individuals and businesses to get used to inflation higher than that of the central bank. 2% target.
The 75 basis point rate hike comes as other central banks in Europe slow the pace of monetary tightening or maintain their loose policies by outlining a rapid rise in inflation that has taken place amid a post-global recovery. pandemic.
The rise was larger than the already large 50 basis point move the markets had taken in and took the bank’s two-week repo rate to 1.50%.
The krone jumped 0.9% against the euro before giving up some of its gains.
The central bank’s move drew unusually sharp criticism from Prime Minister Andrej Babis and Finance Minister Alena Schillerova – whose ANO party faces elections on October 8 and 9 – for compromising the recovery.
Like most countries, the Czech Republic faces global supply issues and rising transport and energy costs, as well as strong demand after restrictions easing from the coronavirus pandemic plus early this year, all of which are driving up prices.
But it also has the lowest unemployment rate in the European Union and a tightening labor market driving wages up, as well as a boiling real estate market and growth in prices like services, and large deficits. budgetary.
Central bank governor Jiri Rusnok said after the board’s 5-2 vote for the hike that there were already signs of rising inflation expectations.
“We need to send a strong signal to society and the economy that we will not resign ourselves to inflation expectations that are taking root somewhere far from our target,” Rusnok said.
“We realize how dangerous this is, how costly our future efforts to bring expectations down to our inflation target would be.”
He said rates would rise further as they were still well below pre-pandemic levels as well as the neutral level for rates the bank is considering of around 3%, while economic growth at 4.1% l next year could be above the breakeven rate of the economy.
The pace will depend on new developments and the bank’s new outlook expected in November, he said.
The finance minister criticized the move on Twitter, saying it put the country on “the same path as developing countries”, while central banks in developed countries supported growth.
Hungary is the only other country in the European Union so far to start tightening, but it slowed its pace last week, with its base rate 15 basis points higher than the Czech rate. Poland’s central bank has resisted any tightening rush, fearing it would thwart an economic rebound.
Headline inflation jumped in August to a 13-year high of 4.1%, more than a percentage point above the bank’s tolerance band around its target.
Ceska Sporitelna analyst Jiri Polansky said the main rate could end 2021 at 2.00% and rise a little further next year.
“But that will depend very heavily on the exchange rate of the krone, the potential strengthening of which could outweigh the intensity of the rate hikes,” he said.
Reporting by Jan Lopatka and Robert Muller; Writing by Jason Hovet; Editing by Frances Kerry and Alex Richardson
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