Hike rates

Czechs set to hike rates as war stokes inflation: decision guide

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The Czech Republic is likely to extend its aggressive campaign of interest rate hikes as the war in Ukraine fuels already rampant inflation and overshadows risks to economic growth.

The Czech National Bank will raise its key rate by at least half a point to 5% on Thursday, according to a large majority of analysts in a Bloomberg survey, adding to 425 basis points of cumulative increases since June. Rate setters repeatedly surprised with larger than expected hikes during the tightening cycle.

Czech policymakers have struggled with resilient price pressures caused by pandemic shutdowns, supply chain disruptions and overheated national labor and housing markets.

After Russia’s invasion of Ukraine further pushed up global commodity prices, the central bank in Prague said consumer price growth could accelerate to around 13-14% this summer, compared to 11.1% in February.

“It is clear that the persistent higher than expected inflation over the past few months, combined with rising inflation expectations and the peak of inflation still ahead of us, warrants higher interest rates,” they said. analysts led by Helena Horska of the Czech unit of Raiffeisen Bank International AG. , wrote in a report this week.

The policy announcement is scheduled for 2:30 p.m. in Prague, followed by a press briefing with Governor Jiri Rusnok at 3:45 p.m.

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 already hurting Czech businesses, including the key auto industry. In addition, the decline in real wages could eventually curb private consumption.

Rate setters could also debate Rusnok’s suggestion that the central bank could consider selling off some of its vast foreign exchange reserves to bolster the krone as an alternative tightening tool. The bank intervened in the currency market at the beginning of the month to avoid an excessive weakening of the krone.

But board member Tomas Holub and deputy governor Marek Mora have since pushed back on the idea and signaled they preferred to tackle inflation with more interest rate hikes.

“I expect a debate about another rate hike, and the only question is how big is it,” Mora said in an interview last week. “Eventually, I think circumstances will force us to go well above 5% with rates.”

ING Groep NV expects a significant economic slowdown this year will not be enough to dissuade the central bank from further tightening, forecasting a hike of 75 basis points in March.

“We believe inflationary pressures will outweigh the risks of stagflation,” said Frantisek Taborsky, strategist at ING London.

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