Czech central bank returns to rate hikes to cool inflation risks

PRAGUE: The Czech National Bank delivered its first interest rate hike since early 2020 on Wednesday, seeking to cool price pressures that have built amid a recovery from the coronavirus pandemic and tightening labour market.

The rate hike, widely expected, follows a similar increase by Hungary's central bank on Tuesday that was the first in the European Union in the aftermath of the pandemic.

With COVID-19 cases coming under control, an economic recovery on track, and inflation at the upper target limit, the Czech bank's board voted on Wednesday to lift its key two-week repo rate by 25 basis points to 0.50%.

Governor Jiri Rusnok is due to comment on the decision at a press conference at 3:45 p.m. (1345 GMT).

Markets are concentrating on clues of how many hikes could follow this year. A Reuters poll last week forecast at least one more.

The rate increase was the first since February 2020 when the key rate rose to 2.25%. It fell sharply in a series of cuts that started just weeks later when the pandemic hit central Europe, leading to production shutdowns and a massive economic hit.

Factories, though, have remained open during later stronger waves of the pandemic, buoying the economy.

The central bank has turned more hawkish this year. Like the rest of central Europe, it is battling a stronger rise in inflation than what is seen in the euro zone or elsewhere.

Fuel prices have been a driver, but the region is also seeing pressure from the end of lockdowns and a re-emergence of labour shortages.

The Czech Republic has one of Europe's lowest unemployment rates at 3.4%, according to Eurostat.

Headline inflation eased to 2.9% in May but the central bank has forecast a spike above 3% this year. It targets inflation at 2% with a tolerance band of 1 percentage point.

The bank forecasts a 1.2% economic rebound in 2021 although some economists see a bigger recovery. The Finance Ministry predicts a 3.1% rise this year.