The Czech National Bank (CNB) has received strong incoming impulses after inflation in the country surged to 16.2% in November after slowing down to 15.1% in October 2022.
Prices were also seen to be rising month-on-month as inflation peaked up by 1.17% after falling by 1.44% in October. Food and housing costs made the most contribution to inflation. Inflation may reach 16.9% in 2022.
Interestingly, inflation was projected to be 19.8% in 2022 without pricing in the effect of the energy savings tariff introduced by the government this year.
However, even with this tariff and other measures to lessen the contribution of high energy prices, it seems that prices are accelerating no matter what measures are taken. Inflation is not going to stop as large companies have already announced heavy price increases for next year. Utility rates, especially on heating, are expected to be raised dramatically by double digits next year, commented Martin Marsovsky, chief manager of Finmex Academy.
The second impulse came from the Federal Reserve (Fed) of the United States that raised its interest rates to 4.5% from 4.0%, slowing down its highly aggressive rate hike trajectory. The Fed has already raised its interest rates by 75 basis points four times this year as inflation peaked to 8.3% year-on-year in September and slowed down to 7.1% in November.
This call means that global inflationary conditions may remain unanchored and other central banks across the globe have to act on their own. Inflation seems to be much more stubborn and may burst again. This is particularly true for Czech Republic as it expects inflation to rise next year.
Nevertheless, the CNB may not raise its interest rates this December as it was not inclined to do so with its own projections of 20% annual inflation and this forecast doesn’t seem to spread any joy.
Czech President Milos Zeman has replaced two members of the board, Vice-Governor Marek Mora and board member Oldrich Dedek, before their terms end in February. This could be a call to action for the CNB. But the big topic of interest rates will certainly be on the top of the agenda within the first three months of 2023 as the Czech Koruna will probably lose ground against the U.S. Dollar at the start of the year.
The board of seven members of the CNB will make a decision on interest rates on December 21. The rates have been at 7% since June 2022.
Any upside move of the CNB will certainly affect the Koruna as its exchange rate will strengthen against the Euro and other currencies and is likely to tame inflation as prices will eventually slow down amid higher borrowing costs.
However, higher interest rates would certainly have a negative effect on domestic industries as companies in major sectors, like car manufacturing and machinery and other low margin sectors, would suffer. According to analysts of Finmex Academy, this could also mean some slowing down of salary increases across industrial sectors as companies will have less money from their exports to cover rising costs.
Although these effects will be felt strongly if interest rates are significantly raised to 12-13% or higher. The CNB is currently holding interest rates far below the inflation level, which makes real rates negative.
Negative real rates usually stimulate businesses to borrow “cheap” money so they can expand. Certainly, such an opportunity is largely linked to bank loan interest rates that provide such credit.