Czechs Lift Rates to Start Campaign Against Inflation Threat

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The Czech Republic raised borrowing costs for the first time since before the coronavirus pandemic, becoming the second country in the European Union’s east to take action against the risk of inflation spiraling out of control.

The central bank raised its main interest rate by a quarter-point to 0.5% on Wednesday, as expected. The move comes one day after policy makers in Hungary increased its benchmark for the first time in a decade to curb the EU’s fastest price growth.

Governor Jiri Rusnok is scheduled to comment on the decision at a news conference at 3:45 p.m. in Prague.

After cutting rates more than anywhere else in the EU at the start of the Covid-19 pandemic, the Czechs are taking a hawkish stance in the debate over whether the global spike in consumer prices is temporary or requires an immediate response.

Now inflation is accelerating amid a labor market that was already tight before the pandemic. An economic rebound is underway as well after authorities lifted lockdown restrictions and a vaccination campaign gained traction, resulting in a plunge in the number of new cases of the virus.

“A glance at the available data does not reveal any reasons for a continuation of the expansionary monetary policy,” said Frankfurt-based analyst Melanie Fischinger at Commerzbank AG. “The economy got through the winter better than feared and the outlook for the rest of the year seems positive not least due to the progress of the vaccination program.”

For almost a year, the central bank’s forecasts had flagged that borrowing costs will rise in 2021. But policy makers frequently warned that they didn’t want to undercut a fragile recovery with premature monetary tightening. They dropped the cautious stance after the previous meeting in May, saying the risks of a prolonged pandemic-induced downturn have weakened significantly.

Inflation Expectations

Rate setters have said that the supply chain problems and higher commodity costs, currently boosting inflation around the globe, may fade. But with Czech price growth currently near the top of their 1%-3% tolerance range, they want to prevent global factors from boosting inflation expectations and fueling demand pressure at home.

Jaromir Sindel, a Citigroup Inc economist in Prague, said another rate increase in the second half of the year, and three more hikes in 2022, appeared to be the most likely scenario.

“A third rate increase this year is possible, if our outlook for a less inflationary labor market recovery and slower growth in core inflation doesn’t materialize,” Sindel said in a report.

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