The central bank left the base interest rate at 3.5 percent. The reason is concerns about inflation.
The Bank Board of the Czech National Bank left the base interest rate unchanged at 3.5 percent. The base interest rate has been at the current level since the beginning of May, with the last time being lower in the first half of December 2021.
The banking board decided on the setting of interest rates, which represent one of the fundamental economic indicators. After all, banking deposit and loan interest rates depend on their level. Lower interest rates bring households more advantageous housing loans and companies cheaper investment and operating loans. Conversely, with higher interest rates, the appreciation of deposits in accounts increases.
The rate remained as expected at 3.5 percent
The financial market already anticipated before the meeting that the central bank would leave the basic interest rate unchanged at 3.5 percent. A year and a half ago, it was still at seven percent. However, it started to decrease thereafter. From last November until this spring, it recorded a decrease of one quarter of a percentage point. Since May, however, the rate has remained unchanged. At the June meeting, all seven members of the board voted for the current status.
"Since the May meeting of the Czech National Bank, when it delivered a quarter percentage point rate cut to the current 3.5 percent, not much time has passed. During that time, we have not received enough signals from the economy about the need for further interest rate adjustments,"
said to Czech Press Office the chief economist of Roklen, Jan Berka.
Inflation Danger
The Governor of the central bank Aleš Michl explained at a press conference after a board meeting that the main reason for leaving rates unchanged are worries about overall inflationary pressures that accompany the economy. This mainly applies to price increases in services, food, a revival in the real estate market, and an overall increase in consumer demand.
"Inflation should be above two percent this year,"
Michl stated in this regard.
The governor emphasized that it is currently necessary to maintain strict monetary policy so that the Czech National Bank can ensure that domestic inflation will move around the two percent target in the long term. In May, year-on-year inflation was 2.4 percent.
"The stability of interest rates at the June meeting is in line with the approach the central bank has already applied to interest rates in the previous two quarters,"
The situation was commented on by Radomír Jáč, an analyst at Generali Investments.
According to him, the repo rate is already in the area of long-term neutral, equilibrium interest rates, which is estimated to be in the range of 2.75 to 3.50 percent.
The future development remains uncertain
Tomáš Pfeiler, an analyst at Cyrrus, stated that the current level of the base interest rate no longer inhibits nor supports economic growth. Therefore, he also assumes that rates will remain stable in the following months. According to him, interest rates could go down in case of a significantly greater than expected impact of the trade war on economic activity.
"The Czech National Bank could potentially lower rates, should the European Central Bank push them down further,"
added Pfeiler.
Petr Dufek, an analyst at Creditas Bank, assumes that this is a break, not the end of the policy of easing monetary policy. According to him, this pause in rate cuts is justified. Inflation is indeed close to the target, but only thanks to the cheapening of fuels and energy, he noted.
For the next meeting, the Banking Board is keeping all interest rate setting options open according to Michl, however, the governor rather assumes their longer term stability.
"At the moment it looks like the rates will remain at this level for some time,"
added the governor after the board meeting.
The financial markets hardly reacted to the June decision, which was already expected in advance. At first, the crown strengthened by 0.18 percent against the euro, however, a few minutes after the announcement of the decision, it already wrote off a significant part of the gains and is trading at a stable level of 24.76 crowns per euro.
Sources: author's text, ČTK, ČNB
