Czech Central Bank Raises Key Interest Rate to 3.75%

On June 18, the Czech National Bank (CNB) raised its key interest rate by 0.25 percentage points to 3.75%. This is the first change in monetary policy since May of last year, when the central bank last lowered the interest rate by 0.25 percentage points.

CNB Governor Aleš Michl cited rising inflation risks as the reason for the move. “According to the updated forecast, there is a risk that inflation will rise slightly toward the end of the year,” he said at a press conference. At the same time, he emphasized that the central bank remains “open to all options” in future decisions.

Michl also pointed to the continued strong growth in lending as well as the debt-financed expansion of government spending. Both factors, he noted, would fuel money supply growth in the economy and thus potentially increase inflationary pressure.

Inflation in the Czech Republic most recently stood at 2.1%, making it one of the lowest rates in Europe. Analysts warn, however, that the effects of higher energy prices—particularly as a result of tensions in the Middle East—as well as potential supply chain disruptions have so far been only partially reflected in consumer prices.

Six of the seven members of the CNB Council voted in favor of the rate hike, while one member voted to keep the interest rate unchanged.

“The aim of today’s decision is to keep headline inflation close to the 2% inflation target on a sustained basis,” the CNB explained in its statement. A prerequisite for this is that credit growth does not become excessive and that the money supply remains within an appropriate range.

The decision was made despite public criticism from Prime Minister Andrej Babiš. A few hours before the meeting, he had stated: “I don’t understand why the Czech National Bank should raise interest rates.” Babiš argued that the current interest rate level was already high enough and could weigh on economic growth.

The possibility of an interest rate hike had already been the subject of intense discussion in the days leading up to the meeting. Representatives of the CNB and numerous analysts had pointed to rising inflation risks, which could be triggered, among other things, by higher energy prices and geopolitical tensions in the Middle East.

The central bank continued to describe the risks to inflation trends as “inflationary.” In particular, it said it was closely monitoring persistently high core inflation as well as the potential economic consequences of the conflicts in the Middle East. Even if the situation were to ease, the CNB would continue to closely monitor the macroeconomic implications.

The political dimension of the debate is noteworthy: Michl was long considered a close confidant of Andrej Babiš. When Babiš entered politics in 2013 and established the ANO movement, Michl worked for a time on his economic policy expert team. Despite this connection, the central bank has now openly opposed the prime minister’s demands.