The Gulf Time Newspaper One of the finest business newspapers in the UAE brought to you by our professional writers and editors.
Bloomberg
The Czech Republic is likely to extend its aggressive campaign of interest-rate increases as the war in Ukraine fuels already rampant inflation and overshadows risks to economic growth.
The Czech National Bank will raise the key rate by at least a half-point to 5%, according to a large majority of analysts in a Bloomberg survey, adding to a cumulative 425 basis points of increases since June. Rate setters have repeatedly surprised with larger-than-expected hikes during the tightening cycle.
Czech policy makers have been battling resilient price pressures caused by pandemic lockdowns, supply-chain disruptions and overheating domestic labor and property markets.
After Russia’s invasion of Ukraine further boosted global commodity prices, the central bank in Prague said consumer price growth might accelerate to around 13%-14% this summer, from 11.1% in February.
“It’s clear that persistently higher-than-expected inflation in the past months, combined with rising inflation expectations and the inflation peak still ahead of us, warrant higher interest rates,†analysts led by Helena Horska at the Czech unit of Raiffeisen Bank International AG, wrote in a report this week.
Before the war, Czech central bankers signalled they were almost done with tightening and might start cutting rates around the end of this year. Like many of their peers, they’re now facing the dilemma of tackling inflation without undercutting economic growth.
Surging costs of everything from commodities to payrolls and a shortage of chips are already hurting Czech businesses, including the key car industry. In addition, falling real wages may eventually curb private consumption.
Rate setters may also debate Rusnok’s suggestion that the central bank might consider selling some its vast foreign reserves to push the koruna stronger as an alternative tightening tool. The bank stepped into the currency market earlier this month to prevent excessive koruna weakening.
But board member Tomas Holub and Vice Governor Marek Mora have since pushed back against the idea and signaled they prefer fighting inflation with more interest-rate increases.
ING Groep NV expects that a significant economic slowdown this year won’t be enough to dissuade the central bank from tightening more, forecasting a 75 basis-point hike in March.
“We believe inflationary pressures will trump stagflation risks,†ING London-based strategist Frantisek Taborsky said.