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Czech Republic Monetary Policy November 2021

Czech Republic: CNB delivers biggest hike in 24 years in November amid mounting price pressures

At its 4 November meeting, the Board of the Czech National Bank (CNB) decided to raise the two-week repo rate by 125 basis points to 2.75%, marking the fourth consecutive hike and surprising markets on the upside. In addition, the CNB increased the Lombard rate from 2.50% to 3.75% and the discount rate from 0.50% to 1.75%. However, the decision was not unanimous: Five out of the seven members were in favor, but two voted to stand pat.

The decision to hike rates again largely came amid mounting inflationary pressures and the release of new macroeconomic forecasts. The Bank sees inflation staying well above the upper bound of its 1.0%–3.0% tolerance range in the coming quarters—approaching 7.0% during the winter—chiefly due to healthy domestic demand, stronger producer price inflation, elevated food and fuel prices, and faster wage growth. Overall, inflation is expected to average 3.7% this year (previous projection: 3.0%), 5.6% in 2022 (previous projection: 2.8%) and 2.1% in 2023 (previous projection: 2.1%). Meanwhile, GDP growth is seen at 1.9%, 3.5% and 3.8% in 2021, 2022 and 2023, respectively.

Looking ahead, the Bank’s baseline scenario projects further tightening ahead amid recovering activity, an overheating labor market and rising housing costs. Moreover, the CNB sees inflationary risks skewed to the upside overall, largely stemming from longer-lasting global supply chain disruptions, a sharper-than-expected increase in energy prices and a weaker koruna, while a more substantial consolidation of public budgets by the new government represents the main downside risk. Therefore, the Bank stated that it stands ready to “continue increasing interest rates in line with the autumn forecast”, which implies “a sharp rise in market interest rates at the end of this year and the start of 2022”.

The next meeting is scheduled for 22 December.

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