Czech National Bank hikes rates to keep inflation in check

The CNB Board voted six-to-one in favour of a base rate increase, taking it to 3.75% from 3.5%. Persistently high core inflation was the primary reason for this move, along with robust credit growth. A potentially expansive fiscal stance is traditionally seen as a source of upward price pressures on the outlook. An overheating housing market remains one of the sources of elevated core inflation, along with strong growth in services prices. The risks have been assessed as pro-inflationary overall, especially considering the tightness of the labour market and solid wage growth.

The resolution of the Middle Eastern conflict will be closely monitored, while second-round effects may still drive price growth. In contrast, weak growth in some of the eurozone’s economies remains an anti-inflationary risk, along with lower oil prices. Future decisions will be based on domestic and external economic data, the geopolitical environment and events, as well as steps taken by other central banks.

Our view is that if core inflation softens marginally in the coming months, as is our current forecast, we will not see further monetary policy tightening at the next meeting in August. However, should core inflation continue to float just below 3% or even accelerate, another rate hike would become the more likely outcome. The resilience of the economy to the recent global negative supply shock and the tightness of the labour market will also factor into decision-making, but core inflation will remain the key driver.