The Czech National Bank (CNB) raised interest rates by a  larger than expected 75 basis points to 1.50% on September 30, taking the most hawkish line in the EU,  after inflation in August increased to its highest level since 2008. 

The hike – the biggest in 24 years – comes at a sensitive time, just a week before the country's general election, and has been criticised by Prime Minister Andrej Babis, whose ruling party ANO is leading opinion polls. He said the CNB decision will damage the Czech economy, negatively impact households with loans, and worsen the financial situation of all companies in the country. 

"Hiding behind rising prices and thinking that we are able to change the global price growth is an illusory fantasy. Is it our companies' fault that world prices are rising at tens of percent per year? Are we capable of changing this market situation?" Babis said.

Finance Minister Alena Schillerova also criticized CNB´s decision. "The cause of inflation is a shortage of raw materials, products and workforce," she said, stressing that the solution is not in raising rates. "At the moment, we do not need to limit the economy by strictly following textbook lessons," she added.

Schillerova warned the central bankers against sharp increases in interest rates last week, stressing that the draft state budget for next year already foresees the start of public finances consolidation. She said that the rate hike would make servicing the state debt significantly more expensive, increase pressure on wage growth and complicate private investment. 

However, CNB governor Jiri Rusnok responded that the CNB bank board is an independent institution and will not take instructions from the government. He also said that further interest rate hikes were necessary, to curb inflationary pressures by reducing the availability of credit and thus overall demand in the economy.

Opposition politicians warned against Babis´ and Schilerova´s interventions. Ivan Bartos, chair of the Pirate Party, said the CNB had no choice but to tame inflation by making loans and mortgages more expensive. "It is all the more striking that the prime minister and the finance minister tried to influence the bank and convince it not to raise interest rates, even though inflation is accelerating in neighbouring countries. Today, the CNB has acted as a truly independent institution," he noted.

Civil Democrat MP Jan Skopecek said the CNB did not have any other options due to the rapidly rising inflation rate. "The inflation rate is well above the CNB's target and if we do not want high inflation to become a permanent phenomenon through higher inflation expectations; this step had to be taken," he said, praising the central bankers for ignoring Schillerova´s unsolicited advice from last week.

"The CNB board is not the Strakova Academy [seat of the government office] or Agrofert [Babis' agro-chemical conglomerate]. Andrej Babis does not seem to understand that the board is not allowed to take instructions from anyone, including the finance minister," commented Marketa Pekarova Adamova, leader of the center-right TOP09. The CNB's constitutional duty is to look after price stability, not the private interests of the PM, she said.

“Czechia is experiencing one of the most dynamic price rises in the EU and the reason for this is, among other things, irresponsible government policy," Adamova added, referring to the highest state budget deficit since 1993. 

The CNB Lombard rate increased to 2.50% and the discount rate to 0.50%. The new interest rate levels come into effect on 1 October 2021.

"The bank board is clearly responding to an increase in price pressures in the Czech economy. A pick-up in inflation poses a risk to the economy: it is an imbalance that would lead to a wobble in price and other expectations in the economy and ultimately lead to a slowdown in economic growth," said Radomir Jac, chief economist at Generali Investments CEE.

According to the experts, the central bank is expected to hike its rates further by the end of this year, to 2.00%. 

Unlike the CNB, Polish and Hungary's central banks are more cautious about tightening their base rates. Hungary's central bank raised interest rate only by 15 basis points to 1.65% a week ago, while Polish central bank governor Adam Glapinksi said that increasing interest rates right now would be “very risky”, despite elevated inflation.