Czechs Mull First Rate Hike Since 2022 to Curb Price Pressures

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(Bloomberg) — The Czech central bank may raise interest rates for the first time in four years as policymakers weigh domestic inflation pressures against receding risks from global energy prices.

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The outcome of the Czech National Bank’s meeting on Thursday is set to be a close call, with 13 analysts in a Bloomberg survey expecting the board to lift the benchmark rate by a quarter of a percentage point to 3.75%. Nine economists predict no change. 

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Governor Ales Michl last week said that the case for a rate increase had strengthened and that a June move was a “real possibility.” While policy is already restrictive, some tightening may be needed to slow an increase in the money supply, which is driven by rising household credit and a fiscal deficit, Michl told Bloomberg. 

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With a “signaling” hike, the central bank would confirm its hawkish stance and send a clear message to households and businesses that it’s determined to fight inflation, according to Dominik Rusinko, chief economist at KBC’s brokerage unit Patria Finance in Prague.

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“But it would most likely be a calibration of an already restrictive monetary policy setting rather than the start of a new cycle of radical rate increases, especially if the Strait of Hormuz fully reopens and the energy shock abates,” he said.

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A potential hike, which would be be the first since Michl took office in the middle of 2022, could heighten tensions with Prime Minister Andrej Babis, who has repeatedly urged his former adviser to lower borrowing costs. The premier has argued that current rates hinder lending and are the reason for expensive mortgages.     

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While global cost pressures from the energy shock may abate with falling oil prices, the bank will decide how tight the monetary setting needs to be to tackle upside risks to core inflation, the governor said. Home-grown pressures also stem from faster-than expected wage increases, as well as persistent growth in prices for services and housing.

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The Czech economy entered the period of the oil shock with headline inflation below target. Policymakers, who have held the key rate at 3.5% for a year, said after the previous two meetings that they wouldn’t react to the primary impact of higher energy costs, but would closely watch out for a potential spillover into broader consumer prices.

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Headline inflation slowed more than analysts expected to 2.1% in May, matching the central bank’s own forecast for the month. But while highly volatile food items continued to dampen overall price growth, the central bank said that this trend was likely to reverse later in the year. 

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The closely watched core measure, which tracks domestic demand pressures, stayed at what the central bank called an elevated level of 2.9%.  

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