We are faced with a fifth lower standard of living. Should the CNB intervene or hold back?

Inflation is most likely to reach 15% this year, its upper limit since the post-revolution era. If we add the estimated reduction in national production as a result of the war in Ukraine, we risk a reduction in the standard of living by one-fifth.

The board of directors of CNB Bank currently does not have an easy position and decides how and to what extent to intervene in order to minimize the damage to the Czech economy.

Raise interest rates and thus tighten investments and make mortgages more expensive? Mix monetary restrictions with the anti-inflationary cocktail and jeopardize the competitiveness of our exports? Or do nothing and believe in the power of the crown in an international financial storm? All the variants will hurt us, each a little different.

Inflation reached 11.1% in February. More than five times what the CNB considers to be an optimum for long-term inflation, ie two percent. At the end of 2021, the rise in consumer prices was one third. Why did Czech prices go off the chain?

Unfortunately, we import some of the inflation as one of the most open economies in the world. The pandemic has caused the collapse of supply and demand chains and a global shortage of raw materials and materials. Consequently, Czech companies are now importing and producing at multiples of what they did before. And in the fall, a significant rise in energy prices on commodity exchanges compounded the problems. We have no chance to influence these factors. Neither the government nor the CNB.

However, the situation in our country has also added fuel to the fire. In the long term, wages have increased more than labor productivity, and the shortage of employees has increased the pressure for higher incomes. After the worst part of the pandemic subsided, we also went on steroids to the store, and our consumer appetite was used by many companies to make it more expensive to compensate for their loss of revenue due to the period of locking.

Soaring energy prices are a separate chapter. In addition, housing costs have been rising for a long time – property prices, rents and mortgages are more expensive.

CNB Governor Jiří Rusnok then describes another nail in the coffin of Czech monetary stability: “In addition to all this, we have had an inflation war component since February. No one could have expected this. It is no longer difficult to answer it in monetary policy, because we will not stop the rate war or cross the gas and oil pipelines. But you have to take that into account.”

And it is this statement that many blame him for. They are afraid of too much interference in the economy in a situation where it is not known how long the war will last and what the consequences will be.

“The CNB’s interventions are a bit of a shooting game. It’s always ‘something for something’. A monetary step cannot be taken without relief on the one hand weighing down the other. The different Views on CNB policy are then very closely correlated with the interests of different groups in the economy.Exporters don’t like the strong krone, investors don’t want to raise interest rates and we’re all scared rising prices,” says Radek Špicar, Vice-President of the Confederation of Industry and Transport of the Czech Republic.

The main objective of the CNB is to prevent high inflation. However, the instrument at its disposal, namely raising interest rates, has many implications for the economy.

First, it strengthens the krone against other currencies. This plays a very important role in a small open economy like the Czech Republic. The strengthening of the krone reduces the price of imported goods, the demand for which is growing. Domestic price growth is slowing, economic activity is declining and the labor market is cooling. And inflation is down. However, exporters are less well placed vis-à-vis foreign customers.

Second, it raises bank interest rates on loans and deposits. Companies will start postponing their investments, households will start saving more. Economic activity slows, wage growth slows, curbing inflationary pressures.

And third, it lowers the price of financial and non-financial assets, such as securities or real estate, because higher interest rates generally reduce their expected returns. The assets therefore become relatively less attractive for higher-yielding bank deposits. Households feel poorer and are starting to save, companies are thinking more about their investment activity.

Overall, this leads to a slowdown in the growth of economic activity due to lower demand, and therefore a slowdown in excessive inflation.


According to the CNB, an increase in interest rates is necessary, otherwise inflation would grow out of control. Companies would pass on the expected rise in inflation to their prices and employees to wage negotiations. High inflation rates could then become part of long-term planning and trigger an inflationary wage spiral. Currently, the base interest rate is 4.5%, but the CNB is expected to raise it further.

The Deputy Governor of the Czech National Bank, Marek Mora, even admits an increase to a record 6%. And he is not alone. Tomáš Holub, colleague and member of the Bank Board of the CNB, also agrees with Mora: “With such high inflation and such a low unemployment rate, which we are witnessing today, new price shocks cannot be ignored. For me, the inflation problem is now a priority from a monetary policy perspective, so I will definitely vote for further rate hikes. »

Even economists agree that some level of interest rate intervention is necessary. Inflation is already high enough to create a big gap in the economy. Real wages have fallen for people, margins and profitability have fallen for businesses.

Where the CNB should stop raising interest rates, whether they reach the current 4.5% or reach 5%, there is a difference of opinion. However, according to the vast majority of them, six percent is too much.

Lukáš Kovanda, a member of the government’s National Economic Council, draws attention to the negative effects of rising interest rates on investments and recommends working with currency restrictions.

“Fighting inflation by selling part of the reserves is more acceptable to Czech businesses and entrepreneurs. They have long complained that an excessive rise in the base rate could suffocate their business, as interest rates “Interest on business loans, for example, increases in parallel with it, thus worsening the availability of financing for new investments, for example Example.”

According to Kovanda, the CNB should also avoid a doubling of mortgage rates. “With the CNB base rate rising to 6%, we should also expect market interest rates to rise and the average mortgage rate to rise in the range of 6-7%.

“It will turn out that some customers will have to turn to rental accommodation,” comments Marek Padevět, director of residential projects at PSN Prague, about the rise in mortgage prices.

Due to the high inflation rate and the weakening of the krone due to the war in Ukraine, the CNB is counting on monetary restrictions. At the end of January, the bank had foreign exchange reserves of around 157 billion euros.

So relatively high, compared to the size of our economy, and therefore of its foreign trade. For example, they are much higher than, for example, the Polish or Hungarian central banks, which have to deal with the weakening of their currency by war in the same way as we do.

However, David Marek, chief economist at consultancy Deloitte, advises caution with monetary interventions and warns of negative effects on our exports: “Given the importance of competitiveness in a small open economy , the exchange rate should be treated with a big caveat.”

On the other hand, the owner of SOMA, Ladislav Verner, asserts that the competitiveness of Czech exports must be based on its added value, and not on a more favorable exchange rate. “The high value-added end product sold globally is sold despite small price fluctuations. When it comes to quality, customers buy.”

However, the sad truth remains that even if the situation is slowly improving, there are unfortunately still few companies in the Czech industry that could be so confident.

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