Money in Czech Republic

Czech Republic - Money

CNB delivers further rate hike in December amid mounting price pressures

At its 22 December meeting, the Board of the Czech National Bank (CNB) decided to raise the two-week repo rate by 105 basis points to 3.75%, marking the fifth consecutive hike and surprising markets on the upside. In addition, the CNB increased the Lombard rate from 3.75% to 4.75% and the discount rate from 1.75% to 2.75%. 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 came amid soaring inflationary pressures and unanchored inflation expectations. Inflation came in at 6.0% in November, well above the upper bound of the Bank’s 1.0%–3.0% tolerance range, amid faster core inflation, spiking energy prices and a weaker-than-expected koruna. Moreover, the economy performed better than forecasted in Q3 amid strong household spending, giving the Bank further room to tighten its stance. Looking at the coming quarters, inflation will hover well above the Bank’s target but should move closer to it in late 2022 or early 2023.

Looking ahead, the Bank’s baseline scenario sees a faster pace of tightening than projected in November, in a bid to anchor expectations and curb second-round effects. 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. Therefore, the Bank stated that it stands ready to “to continue increasing interest rates next year in order to maintain price stability”.

The next meeting is scheduled for 3 February.

FocusEconomics analysts are still assessing the latest decision and new forecasts will be released on 11 January.