The Czech National Bank (CNB) raised the main interest rate by 0.25 basis points to 3.75% on June 18, in the first change in its monetary policy since last May when it lowered the policy rate by 0.25bp.

“According to the updated prognosis there is a risk that inflation will mildly increase towards the end of the year,” CNB governor Aleš Michl told media at a press conference, and added that further monetary changes are "open to all possibilities".

“Dynamics of loans and debt financing of elevated public costs contributes to growth of money in the economy,” Michl was quoted as saying by Czech Television.  

Czech inflation eased to 2.1% in June, the lowest in Europe, however, local market analysts consider elevated fuel prices and disruptions in supply chains have yet to fully translate to price growth of goods as a result of higher import prices.

Six members of the CNB board backed the decision while one wanted to keep the rates unchanged.

“The goal of today’s decision is to secure the overall inflation to stay at the horizon of monetary stabilisation around the 2% inflation goal,” the CNB wrote in a statement on the decision.

“This requires the loan dynamic not to be excessive and the growth of the amount of money in the economy to stay adequate. That way the monetary policy will contribute to maintaining low inflation,” the CNB also stated.

Just hours ahead of the decision Czech Prime Minister Andrej Babiš warned against the rate hike, saying “I don’t understand why the CNB should increase the rates”.

The rate hike was widely discussed as a real possibility during the week leading up to the monetary board meeting, as CNB bankers and local analysts pointed to rising inflationary pressures following the war in Iran, but Babiš has criticised the rates as being too high.

It was a rare statement by Babiš, leader of the ruling populist Ano party, who has been viewed as one of Michl’s political patrons.

CNB assessed the risks and uncertainties for the inflation goal outlook as “proinflationary”, pointing out the “consistency of core inflation” and stated that the “bank board will continue to carefully monitor macroeconomic impact” of the conflict in the Middle East “even after its calming down”.

When Babiš entered politics in 2013, Michl worked for the billionaire PM as an aide who was then building his Ano team of experts following a surprise performance in the 2013 elections, which turned the Ano anti-corruption platform into first the second strongest party and later into a behemoth of Czech politics.