Czech Central Bank Raises Rate 25bp, First Hike in Four Years

The Czech National Bank raised its benchmark rate by 25 basis points to 2.25% on Thursday, the first increase in four years. The board cited fast wage growth and services-sector inflation, plus energy-price effects from the Iran conflict as the main drivers.

The koruna strengthened 0.4% against the euro after the decision, recovering earlier losses from a session that had priced in roughly 20 basis points of tightening. The two-week repo rate now sits at levels last seen in early 2020, before the pandemic cuts.

Governor Aleš Michl said the board discussed a larger 50-basis-point move. It settled on 25 after the latest staff projection showed inflation returning to the 2% target by mid-2026 even without aggressive tightening. The vote was 5-2, with the two dissenters favouring a hold.

The hike changes the carry calculus for the koruna. The CNB now offers a real rate of roughly 0.5% against the eurozone's zero, a gap that had narrowed to near zero before the decision. The differential matters more now because the koruna has been range-bound near 25.00 to the euro since March. The hike breaks the pattern of steady easing that had capped the currency.

Czech two-year yields rose 12 basis points on the day, steepening the curve relative to German bunds. That yield pickup pulls in short-term carry flows, which tend to support the koruna in spot trading during European hours.

The CNB's own forecast shows rates peaking at 2.75% by year-end, implying one more quarter-point move. The market had priced that in before the decision, so the koruna's reaction was muted relative to what a surprise hold would have produced.

The next data point is the July CPI print, due Aug. 10, which will show whether the Iran-driven energy pass-through is fading or accelerating. The CNB's quarterly forecast, released alongside the decision, put inflation at 2.3% for the fourth quarter, within tolerance but above the 2% target. The board stopped short of committing to a second hike. "We will assess the situation at each meeting," Michl said.