Czech central bank once again hikes interest rates significantly

The Czech central bank (CNB) board increased the two-week repo rate by 0.75 percentage point (pp) to 4.50%, to respond to the combination of strong price pressures from domestic and foreign economies, which are gradually passing through to domestic inflation, the CNB announced after a board meeting. 

According to the bank, the interest rate increase will ensure that inflation returns close to the CNB target of 2% and will help anchor inflation expectations. The bank board also increased the discount rate to 3.50% and the Lombard rate to 5.50%.

"Today's CNB rate hike means that the trend of rising mortgage prices started in the middle of last year will necessarily continue," Milos Filip, director of the real estate fund Schonfeld & Co, told the Czech News Agency. 

CNB Governor Jiri Rusnok stressed that further significant interest rate increases should no longer be necessary, under the condition that expectations in the new forecast released by CNB today come true. 

The forecast shows that CNB expects the Czech economy to continue to recover from the pandemic this year. Even despite high numbers of positive COVID-19 cases, the central bank´s forecast does not expect the introduction of anti-epidemic measures having a significant dampening effect on the domestic economy. 

“Economic growth will continue to be driven largely by household consumption, although the initially high year-on-year growth of the latter will be due to last year’s low base,” the central bank said. In 2022, Czech GDP is expected to rise by 3%, followed by a slight growth next year to 3.4%. Economic activity should reach the pre-pandemic level by the end of this year, and export growth will resume in the 2H22. 

Inflation is expected to rise significantly further at the start of this year, exceeding 9%, mainly as a result of a further growth in core inflation and a sharp increase in administered prices. It is forecast to peak in 2H22 and go down gradually, supported by an appreciating Czech crown and the stabilising effect of monetary policy due to domestic demand. 

“Inflation will fall close to the Czech National Bank’s 2% target over the monetary policy horizon, i.e. in the first half of 2023,” the CNB said.