Czech National Bank shocks economists with biggest interest rate hike since 1997

As the Czech Republic emerges from the economic hardships of the pandemic, new challenges are arising as inflation and wages spike. The Czech National Bank, the nation’s central financial authority, is now taking steps to combat rising inflation by raising the base interest rate, a move which has attracted criticism from the government.

Interest rates set by the Czech National Bank affect the amount to be paid for loans, affecting the affordability of mortgages and other significant expenditures, as well as interest rates to be paid by businesses.

The ČNB took economists by surprise by raising the base rate by 0.75 percent, instead of the widely predicted 0.5 percent. This is the most significant rise in interest rates since 1997. The move was driven by rising inflation, which exceeded 4 percent in August and is significantly above the ČNB’s forecasts.

The bank is acting to try to keep negative developments in the economy under control, but its move has been decried by the government. Prime Minister Andrej Babiš said the base rate hike will damage the economy, negatively affect the situation of households taking out loans, and worsen the financial situation of companies. Minister of Finance Alena Schillerová meanwhile said she does not see the move as an effective solution to inflation, and that the ČNB’s decision makes the Czech Republic an exception among developed countries.

“Inflation is being driven by a lack of raw materials, goods and labor,” argued Schillerová. “While central banks in the developed world support growth and living standards, ours has chosen the path of more expensive loans for companies and more expensive mortgages for families, thousands of crowns higher every month,” she added.

Schillerová said inflationary pressures are global, not national, and that the ČNB’s decision will have little effect on anything other than Czechs’ bank balances. The Governor of the ČNB meanwhile claimed that if the government had not been so profligate with its finances, such a significant rise in interest rates would not have been needed. This year’s approved state budget deficit is CZK 500 billion, although in reality it is expected to be around CZK 400 billion. Last year’s deficit was CZK 367.4 billion.

Independent banks have stated that they will not respond to the base rate hike with an immediate increase in the cost of loans or increased interest rates on deposits.

Opposition political parties have praised the ČNB’s move, saying it demonstrates that it has remained an independent institution despite pressure from the Prime Minister and other ANO ministers. The Czech crown has gained in strength as a result of the rate increase, from CZK 25.5 per euro to CZK 25.28 per €1.