The central bank remains vigilant. The base rate was left at 3.5 percent
The Board of Directors of the Czech National Bank has decided to keep the base interest rate at 3.5 percent. The main reason is that the domestic economy is at its potential level and the fact that inflationary pressures persist. The stated value has been in effect since the beginning of May.
Some members of the council and analysts already anticipated before the central bank's meeting that the base interest rate would remain unchanged at 3.5 percent. The reasons for the stability of interest rates are, according to them, mainly ongoing inflationary pressures in the Czech economy.
Interest rates of the central bank determine the interest rates of bank deposits and loans. Higher interest rates bring more expensive investment and operating loans to businesses, and more expensive housing loans to households. However, with higher interest rates, the appreciation of deposits in accounts increases.
Agreement prevailed even before the meeting
Vice Governor Jan Frait in an interview for Bloomberg agency said that overall inflation is mainly kept at an acceptable level due to the drop in energy prices, which, however, may not be a long-term phenomenon. According to him, the risk remains the rising price of services, associated with rapid wage growth in the face of lower productivity in this sector, as well as the still rapid rise in property prices. Inflation in services is currently about one percentage point higher than before the pandemic and remains a significant factor.
Another member of the banking board, Jan Kubíček, in an interview for the agency Reuters, explained that the rates should also remain stable due to the uncertainty surrounding fiscal policy prior to the October elections. Kubíček further pointed out that inflation was held at 2.5 percent in August, above the target of the Czech National Bank, but a stronger exchange rate of the Czech crown helps to dampen price pressures.
According to Fraita, monetary policy is no longer acting restrictively. He claims that the current setting of rates, together with the exchange rate of the Czech crown, has a rather neutral effect on the economy. The banker states that for the domestic economy, it is now at its potential level. Real incomes are growing, household sentiment is improving, and higher government spending boosts consumption and ceases to create deflationary pressures. In the current situation, therefore, he sees no reason to further reduce interest rates.
Strict monetary policy applies
The governor of the central bank, Aleš Michl, confirmed at a press conference following the September board meeting that a greater easing of fiscal policy would pose a risk of increased inflation.
"The current situation still requires relatively strict monetary policy. The amount of money in the economy is growing due to the intensification of credit activity, especially in the real estate market. Wage growth is related to how tense the labor market is,"
the governor Michl said, adding that all seven members of the banking board voted to keep the rate at 3.5 percent.
Mortgages should remain stable
"The statement of the management of the Czech National Bank, together with the August forecast and the persistent rhetoric regarding pro-inflation risks, convince us that the rates may stay at the current level of 3.50 percent for at least a year,"
Economist J&T Adam Ruschka informed in a statement. Also according to analyst Generali Investments Radomir Jace, the cycle of monetary policy easing has already ended, as he told LP-Life. In this context, he reminded that the central bank began a cycle of interest rate cuts in December 2023. The stated assumption Czech Press Agency also confirmed the main economist of Investika, Vit Hradil.
"Renewed interest in mortgages is pushing up property prices. The Czech National Bank therefore has no interest in pouring oil on the fire by further lowering rates in these areas,"
Hradil stated.
The mortgage rate is influenced not only by the development of interest rates, but also significantly by the development of longer rates in the capital market, especially the yields of crown government bonds, Jáč added. They are currently experiencing a relatively noticeable year-on-year increase and the room for further mortgage rate reduction is thus significantly narrowing according to him.
According to mortgage specialists, the expected maintenance of rates means that mortgage rates and monthly repayments will remain relatively stable, without any significant discount. On the other hand, savings accounts could continue to slightly decrease, as the competition is significantly lower for deposit products. Customers with deposits do not usually change the bank because of a difference of a few tenths of a percentage point.
The next monetary policy meeting of the Czech National Bank is scheduled for November 6. Unless something fundamental happens in the domestic or world economy by that time, we can expect that the base interest rates will be kept at the current level even during the Christmas season.
Sources: author's text, own questioning, CNB, CTK
