The development of April inflation helped bankers to reduce the base interest rate. However, further decrease is not yet certain.
The Bank Board of the Czech National Bank at its May meeting lowered the base interest rate by a quarter percentage point to 3.5 percent. The rate thus reached its lowest level since the beginning of December 2021. According to bankers and analysts, economic developments gave arguments for lowering the rate and for keeping it at 3.75 percent.
The likelihood of rate cuts was supported, according to experts, particularly by Tuesday's preliminary estimate of April inflation, which at an annual rate of 1.8 percent was the lowest in seven years. It is also necessary to remind that the central bank kept the key interest rate at seven percent during the inflation wave. It began to lower it in December 2023. Since last November, the bank's board alternates between cutting rates by a quarter of a percentage point and leaving them unchanged.
"When I started, inflation was around 17 percent. 1.8 percent is a fantastic success. The risk of imported inflation from abroad also decreased significantly,"
said at a press conference after a meeting of the banking board the governor of the central bank Aleš Michl and added:
"The goal of today's decision is to ensure that the overall inflation is stably established near the two percent level for a long-time."
According to the Czech National Bank, the tolerance band was under three percent. If inflation was higher, it would mean using tools of active restrictive monetary policy to tame it. In recent months, this indicator was slightly above two percent.
Zamrazilová fears overheating of the real estate market
However, before the start of the May banking council, its member and Vice Governor Eva Zamrazilová was cautious, when for the magazine Newstream she stated that the rate should now remain unchanged. She cited the steady growth of service prices and the increasing prices of real estate through so-called imputed rent as the main reason.
"The real estate market will thus be a key factor as to why interest rates must be higher than if property prices were growing at a normal two percent pace,"
said Zamrazilová in the article, adding that the prices of real estate are affected by the fact that people began to release savings accumulated in previous years. Nonetheless, six out of seven board members eventually opted for a reduction rate of 0.25 percentage point.
Future trend
Experts argue that the current decision is a logical step. They also predict that the rate will drop further this year. However, it is still uncertain when that might be.
"The development and outlook of inflation offered room for cautious lowering of the Czech National Bank's interest rates and the bank board used some of this space at its May meeting,"
CTK said analyst Radomír Jáč from Generali Investments regarding this. He expects that the central bank will reduce its interest rates again at the August meeting and the repo rate could subsequently stabilize at 3.25 percent for a longer period.
"However, the bank, due to domestic and foreign risks, will probably schedule a break at its next meeting at the end of June,"
suggests the future situation, Creditas Bank analyst Petr Dufek.
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. But at the same time, with higher interest rates, the appreciation of deposits in accounts increases.
Bankers slowed down the forecast of the domestic economy growth rate
The Czech National Bank at its May meeting, also left the outlook for economic growth unchanged for this year at two percent. However, it deteriorated the expected growth for next year to 2.1 percent compared to the February estimate of 2.4 percent.
The outlook for the average inflation for this year and the next was then worsened by the central bank by 0.1 percentage point, assuming 2.5 percent this year and 2.2 percent next year, as can be seen from the new macroeconomic forecast, which it presented.
According to bankers, economic growth is primarily driven by household consumption, which has been bolstered by a rise in real wages and a drop in interest rates. Foreign demand, however, remains subdued, primarily due to a decline in European industry. In the future, uncertainties related to the trade policy of the United States also represent significant threats to foreign demand.
Sources: ČNB, ČTK, Newstream.cz
