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Projected rise in interest rates to counter inflation

The Czech central bank could accelerate its interest rate rises this month to tame unexpectedly fast inflation fueled by the European Union’s lowest unemployment rate, said Deputy Governor Marek Mora.  Government bond yields have risen. While global factors are driving up consumer prices, Mora said that the main inflationary challenge for Czechs was domestic pressure “very robust” linked to a lack of workers that has continued despite the interruptions of work due to the pandemic. While the neighboring euro area and Poland are sticking to bond purchases and historically low rates to stimulate their economies, the Czech Republic and Hungary have increased financing costs to curb rapid price growth.  Czech inflation has risen to the highest levels since 2008 last month and exceeded the 2% central bank target for almost three years.


The relationship with unemployment

Unlike the central banks that are emphasizing the transitory nature of inflation, Mora said that the rigid Czech labor market requires action rather than just words.  The nation of 10.7 million people has even more jobs available than the unemployed, even after months of a tight pandemic blockade earlier this year. In addition to the lack of workers that is driving rapid wage growth, potential inflationary risks also include high household savings and public spending, according to Mora. For him, the current rises mean that the central bank is only “gradually reducing still very relaxed monetary conditions” rather than exacerbating them. Money market prices now show bets for half a point tightening measures at both the 30 September and 4 November policy meetings, after which investors expect the pace to slow down.  The government’s five-year bond yield increased by 3 basis points to 2.01%, trading at the highest premium over German bunds for over two decades.

The scenarios

Mora refused to comment on political perspectives beyond September, indicating persistent uncertainties.  He said that a possible drop in global material prices and a slow vaccination in some parts of the world, among other factors, could result in “temporary disinflationary pressures or even deflationary pressures” at home in 12-18 months. In any case: “We will probably not make a big mistake if we move slightly faster than we have done so far,” Mora said. “It is possible that the overall extent of the tightening up is the same, but we will have to anticipate more”.

Source: CNB
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