Czechs Hike Rates for Second Time This Year to Tame Price Risks

The Czech central bank raised interest rates for the second time this year to tame inflation risks from resilient domestic demand and higher energy prices.

The bank board increased the benchmark rate by a quarter of a percentage point to 4% on Thursday, in line with expectations of most economists in a Bloomberg survey. Governor Ales Michl will comment on the decision and present highlights of the new quarterly economic forecasts at 3 p.m. in Prague.

Czech policymakers lifted borrowing costs for the first time in four years in June, and left them unchanged at the two subsequent meetings. They are now weighing upside inflation risks from strong consumer spending as well as higher oil and natural gas costs even after recent signs of potential de-escalation in the Middle East conflict.

The rate hike defies pressure from Prime Minister Andrej Babis, who won last year’s elections on promises of more affordable housing and has blamed monetary policy for expensive mortgages. Babis repeated his criticism just hours before Thursday’s rate decision, saying the current level of official rates is “incomprehensible.”

The Czech decision contrasts with Poland’s, a country seeing faster inflation but where the central bank left the key rate unchanged at 3.75% on Wednesday.

While Czech headline price-growth slowed slightly in October, it remained above the 2% target for a second month. Inflation is expected to accelerate in the coming months and exceed 3% early next year on higher energy prices and more expensive food.

Czech central bankers, whose sole mandate is price stability, are also concerned about core inflation. This measure , which excludes volatile items like food and energy, has already exceeded the 3% upper end of the bank’s tolerance range.

Closely watched services prices rose 4.5% from a year earlier last month, a pace that the central bank has called elevated. The housing market, wage growth and plans for more government spending financed by debt are also adding to inflation risks.

Investors have trimmed bets on further policy tightening following the recent decline in oil prices, with forward rate agreements now indicating expectations of between two and three additional hikes over the next 12 months.