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The Czech central bank raised interest rates to their highest level in two decades and signaled that it would raise them further as soaring inflation overshadows risks to the economy from the war in Ukraine.
Policymakers raised the key rate by half a point to 5% on Thursday, bringing cumulative increases to 475 basis points since June. The move matched the median forecast from a Bloomberg survey and followed a series of even bigger hikes in the previous four meetings.
The Czechs struggled against resilient price pressures caused by pandemic shutdowns, supply chain disruptions and overheated national labor and housing markets. With Russia’s invasion of Ukraine further raising global commodity and energy costs, the central bank expects consumer price growth to pick up to around 13%-14% this summer, compared to 11.1% in February.
Governor Jiri Rusnok said the board also debated the option of raising rates by 75 basis points, but agreed to wait for more data and his next quarterly forecast. While the war in Ukraine is a threat to economic activity, the bank is reacting mainly to a further increase in domestic inflationary pressures, according to the governor.
“Restoring price stability quickly is now a top priority,” Rusnok told reporters.
The krone gained 0.3% against the euro after Rusnok’s comments.
Before the war, Czech central bankers signaled that they were almost done with the tightening and that they could start cutting rates towards the end of this year. Like many of their peers, they now face the dilemma of fighting inflation without undermining economic growth.
Soaring costs of everything from raw materials to wages and a shortage of chips are hurting Czech businesses, including the key auto industry. In addition, the decline in real wages could eventually curb private consumption.
The central bank said intensifying price pressures will require much tighter monetary policy and for a longer period than projected in its February forecast.
“The bank’s board is closely monitoring current developments and stands ready to continue raising interest rates to prevent inflation expectations from deviating from the 2% longer target. term,” Rusnok said.
The bank’s board has not had a very detailed discussion about selling off some of its vast foreign exchange reserves to bolster the krone as an additional inflation-fighting tool, according to the governor.
Although the use of money is not “taboo” in extraordinary situations, rates remain the preferred instrument, he said.
“We still have room to use our standard tool, which is interest rates,” Rusnok said.
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