The Czech koruna rallied by around one percent against the euro on Thursday after the Czech National Bank (CNB) announced a larger-than-expected increase to its main interest rate.
The CNB raised its reference rate by 75 basis points, the largest such move in 24 years, taking the two-week repo rate to 1.50%. Investors were bracing for a hike at this week’s meeting following recent higher-than-expected inflation data, hawkish comments from policymakers and the very proactive nature of the CNB monetary policy. The move was, however, larger than the 50 basis point hike expected by the consensus, and dwarfs the two previous 25 basis point moves in both June and August.
In August, inflation in Czechia increased to 4.1% year-on-year (Figure 2), its highest level since 2008 and significantly above the upper band of the CNB’s 2%±1% target. Core inflation also jumped to 4.8%, its highest level in more than fourteen years. The CNB’s moves can be seen as preemptive, as internal price pressures are likely to increase with improvements in the economic situation and the labour market. Additionally, it could be seen as an attempt to try to limit a rapid increase in house prices, which has become an issue in recent years.
Futures markets are continuing to price in hikes in Czechia during the remainder of the year and 2022. Rates are expected to reach somewhat higher levels than at the end of the previous hike cycle in early-2020, when the two-week repo rate was raised to 2.25%.