Energy Costs Add to Emerging Central Banks’ Inflation Headache

In a bold response to the price pressures, the Czech National Bank (CNB) on Thursday raised its main interest rate by 75 basis points, its biggest hike since 1997. It cited rising energy prices as well as supply-chain disruptions and domestic factors like higher costs in owner-occupied housing and services.

The country’s prime minister said the hike would damage the economy, illustrating the dilemma emerging central banks face as they try to head off inflation, already running above target levels, while sustaining fragile economic recoveries from the COVID-19 pandemic.

Benchmark European gas prices have surged more than 300% this year due to factors including low storage levels, outages and high demand as economies rebound, dragging up wholesale electricity costs.

The Czech Republic, Poland, Hungary and Romania were more exposed to the rise than the rest of the European Union because energy and utilities account for a relatively large share of their consumer price index baskets while their electricity supplies are more exposed to carbon-intensive sources, Goldman Sachs analysts said.

Turkey has been clobbered too, with natural gas prices for industrial use and electricity production rising by 15% last month.

Consumer prices had generally grown by more in countries where the economic rebound had been faster between the third quarter of 2020 and the second quarter of 2021, said S&P Global Ratings lead economist Tatiana Lysenko, highlighting Poland, Hungary, Russia and Brazil.

“Inflationary pressures in emerging European economies are proving to be more persistent than we anticipated,” said Lysenko.

“EMEA central banks will continue to navigate a complicated landscape, seeking a balance between supporting the recovery and anchoring inflation expectations in an environment where supply-side pressures may last longer than previously anticipated.”

With higher global energy and food prices showing few signs of easing and the Czech Republic, Hungary and others also facing tighter labour markets, inflation pressures should linger.

Goldman Sachs forecasts inflation for the year at 4.5% in Romania, 3.9% in the Czech Republic and 3.7% in Poland.

The Czech central bank said more rate rises would follow Thursday’s big hike as it aimed to prevent people and firms from getting used to inflation overshooting its 2% target.

Hungary plans to tighten policy more too, with base interest rate hikes of 15 basis points in the coming months, deputy central bank governor Barnabas Virag said on Friday.

Virag’s comments and the Czech hike gave a boost to both country’s currencies, with the Czech crown hitting one-month highs against the euro.

Poland may also be tempted to deliver an earlier than expected hike, say analysts.

Citi analysts said they expect Poland to deliver its first rate hike in March or April 2022, but they added that faster-than-expected hikes were possible if the bank became more confident about the strength of economic growth.

Turkey is likely to prove an exception, however. President Tayyip Erdogan’s desire for stimulus often trumps an orthodox approach to monetary policy.

Despite inflation running above target at 19.25%, the central bank last month slashed its policy rate by 100 basis points to 18%.

“Turkey is most vulnerable to higher energy costs as they have historically caused its balance of payments to deteriorate as import costs have increased,” said David Rees, Schroders senior emerging markets economist.

“The lira has come under pressure after the recent surprise rate cut and may continue to sell-off if energy prices rise further.”

The lira has slumped to record lows recently, reawakening memories of a 2018 currency crisis and eroding the earnings of Turks.

For a look at all of today’s economic events, check out our economic calendar.

(Reporting by Tom Arnold; Editing by Hugh Lawson)

Czech Central Bank Chief Defends Rate Hike Criticised by Finance Minister

Schillerova said the hike turned economic policy toward one typical for developing countries.

“Those words are absolutely incompetent,” Rusnok said during a television debate. “Terms are being used that do not fit.”

He said economic policy encompassed fiscal and structural policies as well as the central bank’s domain of monetary policy, and that he was sure other central banks would follow suit in tightening their monetary policies.

Ahead of the on Oct. 8-9 election, for which Schillerova leads the ruling ANO party’s candidate list in the south-eastern region, he said the independent Czech central bank did not feel pressured by the government.

“We do not feel any political pressure, these things happen at more tense phases of developments. In our situation, I do not feel any threat of this kind,” Rusnok said.

The bank‘s move, which exceeds the 50 basis point tightening expected by financial markets, took the main repo rate to 1.5%.

Rusnok said on Thursday more hikes would follow, and repeated that on Sunday.

For a look at all of today’s economic events, check out our economic calendar.

(Reporting by Jan Lopatka; Editing by Catherine Evans)

Czech Central Banker Holub ‘quite likely’ to Support 50 bp Hike in Sept, Open to More

Speaking to Reuters in an interview conducted on Monday, Holub struck an overall hawkish tone, also saying the debate on whether to move by 25 or 50 bps could be repeated in November. The central bank last raised its main rate by more than 25 basis points in December 1997.

The Czech National Bank raised its main two-week repo rate by 25 basis points in June and then by another 25 basis points in August, taking the rate to 0.75%.

Holub said monetary tightening would likely continue into 2022, a view reinforced by last month’s sharp spike in inflation and signs of further price pressures ahead.

Central Europe has been grappling with stronger inflationary pressures than some other European countries. Economies in the region have faced tight labour markets and solid post-pandemic demand as well as external factors like rising energy costs and global supply crunches.

Holub said he had already considered voting for a 50 basis point increase last month and would likely support the bigger move at the September meeting, noting that inflation overshot the central bank’s forecast significantly in both July and August.

“For me, it has quite visibly tilted towards not only the need to continue with rate hikes at each following meeting, but also the need to insert some stronger step,” Holub said.

“It is quite likely that I will lean towards that already now, in September,” he said.

Headline inflation accelerated to 4.1% year-on-year in August, its highest since 2008. It was also a full percentage point above the central bank’s forecast and double its official 2% target.

Producer prices (PPI) rose by 9.3% year-on-year in August, the fastest growth since April 1993.

MAJORITY FORMING

One board member had voted for a 50 basis point hike at the last two meetings and at least two others signalled their openness for a 50 basis point move.

Holub said he expected the debate on the size of a hike to continue at the November meeting, adding he was “open” to the possibility of another 50 basis point increase then.

“If the new (staff forecast due in November) shows the need to make one more stronger step, then I will be certainly open to such a debate,” Holub said.

“The rates are still low nominally, and even lower in real terms, so from my perspective probably even the debate at the November meeting can be more about a quarter or a half (percentage point move),” he said.

Several central banks around the world have embarked on a monetary tightening path as their economies rebounded from the COVID-19 pandemic, including those in Hungary, Iceland or South Korea. A Reuters poll showed Norway’s central bank would likely join that camp with a rate hike on Sept. 23.

Financial markets are expecting the Czech repo rate to rise by around 100 basis points by the end of the year, forward contracts showed. Holub said such bets were “not irrational”.

“I think the market has basically understood the situation adequately,” he said.

There are three more policy meetings scheduled this year, including the one due to take place on Sept. 30.

For a look at all of today’s economic events, check out our economic calendar.

(Reporting by Robert Muller; Editing by Ana Nicolaci da Costa)

Czech Koruna Advance After First Interest Rate Hike in Almost a Decade

The Czech koruna advanced against the US dollar today after the central bank decided to hike its key two-week repo rate.

The Czech National Bank raised its main interest rate by 20 basis points to 0.25% and the Lombard rate by 25 basis points to 0.50%, while keeping the discount rate unchanged at 0.05%. Such decision was expected by some analysts. It the first change in borrowing costs since November 2012 and the first domestic hike since February 2008. Furthermore, it was the first rate increase in the European Union in more than five years.

USD/CZK dropped 0.53% to 21.8993 as of 12:30 GMT today.

This post was originally published by EarnForex