The Czech National Bank's board raised its base interest rate again to its highest level since 1999, by 0.75 percentage point (pp) to 5.75%, to tame surging consumer prices. Five members voted in favour of this decision; two members voted for leaving the rate unchanged at 5%.

While the CNB tightened the cycle with a 75 basis points (bp) hike and surprised the market, the Polish central bank, by also hiking 75bp, opted for a smaller hike than expected. At Thursday's policy meeting, the Polish central bank’s Monetary Policy Council raised its interest rates for the eighth consecutive hike, up by 75bp to 5.25%, amid soaring inflation, which hit 12.3% in April. 

The Hungarian National Bank raised its base rate by 100bp to 5.4% last week. 

As Joseph Marlow, Assistant Economist at Capital Economics said, with inflation still the main concerns for both countries, interest rates are expected to rise to at least 7.0% this year. 

The economists had expected a Czech interest rate rise of only 0.5pp. The increase in interest rates is more modest than in the baseline scenario, the central bank governor Jiri Rusnok said, as it takes into account the extreme external cost pressures behind the acceleration in inflation this year and the exceptionally high uncertainties and risks to the forecast. At the same time, however, today's rate hike is larger than recommended by the alternative scenario, he added.

"Today's CNB decision was a surprise for the market, to which the koruna reacted by strengthening below CZK24.60 to euro," said Jakub Seidler, an economist at the Czech Banking Association. According to him, the current economic development shows a stagflationary trend, adding that the CNB still seems to consider fighting inflation as its priority above an excessive slowdown in the real economy.

"Raiffeisenbank's forecast expected a peak of 5.75%, but we anticipated the central bank to spread this shift over two meetings," the bank's analyst Vratislav Zamis pointed out. As he stressed, the unexpected hike opens up the possibility that the base rate will go up to 6% in June. 

The question now is whether the rise in the base interest rate will stop at six percent or even higher, added Trinity Bank analyst Lukas Kovanda. He noted that a rise in the base rate this year to 6.25% or even to 6.5% cannot be ruled out. Apart from stronger inflation, the expected arrival of a new and less 'hawkish' CNB governor could also be a reason, he stressed. The new governor and his new bank board will be appointed in 2H22.

"In my view, CNB interest rates are close to their peak. The base rate may remain at 5.75% for a longer period of time, and any increase at the June meeting should be modest," said Radomir Jac, chief economist at Generali Investments.

"This may seem like a Don Quixote-esque battle with windmills, with the central bank raising interest rates and inflation continuing to rise, but the impact of tighter monetary policy has not yet had time to show up in inflation," Deloitte chief economist David Marek pointed out. 

"Inflation is expected to continue to rise, which is why further interest rate hikes are not unrealistic," said Tomas Kudla, Ebury's Commercial Director for the Czech Republic and Slovakia.

According to Frantisek Taborsky, FX & FI Strategist at ING Bank, the Czech central bank is closest to the peak of interest rate hikes in the region. "We expect the next central bank meetings to determine the peak in this cycle. At the same time, we do not expect the first interest rate cut before the end of the first half of next year," he said.

Taborsky believes that the theme of rate cuts will dominate the second half of this year. "We see the discussions on possible interest rate cuts as a negative factor for the koruna, although we see the reversal in EUR/USD as a positive factor. Overall, we do not expect significant moves in either direction from the koruna in the coming months," he added.

The CNB also issued its new forecast, in which it worsened its estimate of economic growth for this year and significantly increased its inflation estimate, expecting it to average 13.1% this year. It is expected to fall to 4.1% next year.

"Early inflation numbers from the region suggest that inflation will continue to surprise on the upside. In the Czech Republic, we expect a rise from 12.7% year-on-year to 13.5% y/y for April and a peak in May/June at just below 15%, but inflation should remain in double-digits for at least the rest of this year," said Taborsky. 

GDP growth is forecast to reach 0.8% this year and 3.6% next year. "GDP growth will slow down significantly this year and economic activity would even fall slightly y/y in the 2H22, driven by the decline in household consumption, fixed investment and exports. Economic growth will pick up next year," Rusnok said.

The CNB also raised the Lombard rate by 0.75pp to 6.75%. The discount rate rose by 0.75pp to 4.75%.