Czech Central Bank Raises Rate For Ninth Time

The Czech National Bank on Wednesday raised its key policy rate for a ninth policy session in a row as policymakers expect the inflationary pressures to remain elevated for some time.

The Bank Board, led by Governor Jiri Rusnok, raised the two-week repo rate by a bigger-than-expected 125 basis points to 7.00 percent, the highest level since 1999.

Economists had forecast a 100 basis points hike to 6.75 percent.

"This is in response to a continued marked increase in inflation pressures in the Czech economy," the bank said in a statement.

"The Bank Board assessed the risks and uncertainties of the spring forecast as being markedly inflationary and acting towards a need for further significant tightening of monetary policy," the bank said.

The central bank has raised interest rates in every session since June 2021, taking the key rate from 0.25 percent to 7.00 percent.

Upside risks to the outlook included a sharp rise in energy and commodity prices amid the war in Ukraine, a weaker koruna exchange rate, the threat of inflation expectations becoming unanchored from the bank's 2 percent target, less restrictive fiscal policy this year and next and the future course of war and monetary policy stance abroad.

The bank asserted that restoring price stability soon was now the absolute priority and it was a necessary condition for the long-term prosperity of the Czech economy.

Headline inflation hit 16.0 percent in May and the bank's spring forecast showed that inflation is set to remain in double-digits this year but is likely to fall quickly in the first half of next year and return close to the 2 percent target in late 2023.

Five board members voted in favor of the decision to raise the key interest rate by 125 basis points and two members voted for leaving rates unchanged.

The latest meeting was the last for Governor Rusnok, whose term is coming to an end this month.

"We think that inflation may be nearing its peak, and the appointment of three new board members also means that the board will probably have a more dovish makeup from July," Capital Economics economist Joseph Marlow said.

Capital Economists expects that the CNB will most likely end its tightening cycle with a 50 basis point hike at its August meeting, taking the policy rate to 7.50 percent.

However, the policy rate is likely to remain at a high level for longer than most currently expect as inflation is set to remain above 10 percent until early next year, Marlow added.

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