Czech central bankers increased the two-week repo rate above analysts´ expectations on November 4, hiking it by 125 basis points to 1.75%, the highest rate hike in the past 24 years, to fight surging inflation, which saw the highest growth in the past 13 years to 4.9% in September.

At the same time, the CNB increased the discount rate to 1.75% and the Lombard rate to 3.75%.  

“The rise in rates will limit the pass-through of these pressures into prices in the longer term, ensuring the return of inflation towards the 2% target at the monetary policy horizon. The Czech National Bank’s response will also help anchor inflation expectations at its target,” stated the Czech National Bank (CNB) report. 

"A number of institutions and entrepreneurs were expecting a rise of between 50 and 100 basis points. The 125-point rate hike is another strong and loud signal from the CNB board that it is taking rising inflation and the confluence of several inflationary pressures seriously," said Pavel Peterka, chief economist at Roklen Group, as quoted by news website Novinky.cz. 

"If the sharp 0.75 percentage point increase at the last [CNB] meeting was something of a surprise, the current move is a major surprise. It is clear that the CNB is fully aware of its mission to maintain reasonable price growth and has therefore decided to take this fundamental step," commented Petr Kriz, a partner at PwC, for the Czech News Agency.

“CNB shocked everyone with a 125bp interest rate hike at today’s meeting and while this was clearly intended to front-load tightening, the hawkish communications suggest that the tightening cycle still has some way to go,” commented Liam Peach, an economist from Capital Economics. “We had highlighted for some time that investors were underappreciating the hawkish bias at the CNB and flagged the risk that policymakers would raise interest rates aggressively to take the heat out of the economy,” Peach added. 

The massive “increase in the key interest rate means that the [CNB] board perceives significant inflation risks and the need for a strong monetary policy response to prevent medium-term inflation expectations from rising. The CNB's next steps in interest rates will depend on developments in the economy in terms of inflation and economic growth, and it will also be important whether and how significantly the Czech koruna appreciates," said Radomir Jac, chief economist at Generali Investments CEE.

As BHS chief economist Stepan Krecek put it, even the astronomical increase in interest rates will not be able to avert the price increases that are ahead by the end of this year. “However, it gives us hope that price growth will slow down next year," Krecek said.

Jakub Seidler, chief economist at the Czech Banking Association, also warned that the rate hikes will be slow in curbing inflation. According to him, the impact of these massive hikes on inflation will only become apparent within a year. "The market is now expecting the central bank rates to go further up and reach 3.5% during the December and February meetings," he noted.

On the other hand, according to Deloitte economist Vaclav France, the tightening of monetary policy is appropriate. "Although the CNB will have no effect on energy and other commodity prices, which are currently rising steeply, it is preventing them from spilling over into inflation expectations. Only if inflation expectations are kept stable will inflation return to normal levels once the excesses in commodity prices subside," he said. 

France expects the CNB to continue tightening monetary policy. "But it would no longer have to 'fire a bazooka' against inflation as it does today," he noted. Also Lubor Lacina from the Faculty of Operational Economics at Mendel University in Brno expects further interest hikes by CNB at its next meetings until inflation returns to 2%. 

This has been confirmed by the CNB governor Jiri Rusnok during the press conference following the meeting. Rusnok assured that this was certainly not the last increase in rates in the near future. If the inflation is high, “taking interest rates towards neutral [3%] may not be enough”. 

Peach expects CNB rates to reach 3.75% next year, up from previous forecast at 3.25%. “We think the scope for further large interest rate hikes is now becoming increasingly limited and we expect the tightening cycle to end in 1Q21 after another 100bp of rate hikes, to 3.75%,” he stressed.