The basic interest rate has dropped to 3.75 percent and is therefore at the lowest levels for the last three years.
The Governing Board of the Czech National Bank has returned to easing its monetary policy. At its February meeting, it unanimously cut the base interest rate by a quarter of a percentage point to 3.75 percent. This happened after it decided in December to keep the base interest rate at four percent.
The Banking Board followed the trend of reducing rates from the past, when the rate gradually decreased from seven to 4 percent. Thanks to this, the base interest rate of 3.75 percent is currently at its lowest level since the end of January 2022.
The rates for bank deposits and loans depend on its value. Lower interest rates bring households advantageous housing loans and cheaper investment and operating loans for companies. Conversely, when interests are higher, the value of account deposits increases.
Experts and even the market were not particularly surprised by the bankers' decisions. Thus, on the day of the announcement, the exchange rate of the crown also held around the level of 25.14 crowns per euro, where it had been previously.
"Both the development and outlook of inflation and the gradual recovery of Czech economic growth argue for reducing interest rates," said
the current state was described by ČTK analyst Generali Investments Radomír Jáč.
Inflation remains a specter
The rate of 3.75 percent, for which all seven members of the board voted, thus also approached to the current rate of inflation, which was released by the Czech Statistical Office just a few hours earlier.
According to the office's preliminary estimate, the year-on-year inflation in January was 2.8 percent. This is still a little more than originally expected. The inflation target of the central bank is, after all, two percent.
"The prices in the 'food, alcohol and tobacco' section increased by a high 3.5 percent month-on-month. This is the main reason for the surprise. On the other hand, energy prices have only increased by 0.2 percent month-on-month. From the perspective of monetary policy, it may be important that service prices are still rising very strongly,"
office analyst Jiří Polanský told LP-Life.
The specter of revived inflation does not abate. That is why bankers do not expect the current loosening trend to deepen at the next monetary policy meeting, which will take place on March 26.
"The Czech economy is reviving. However, it is still operating below its potential. Gross domestic product will increase by 2 percent this year. It will be driven mainly by household consumption. We want to have rates above inflation and thus motivate the public to save. The banking board will proceed with further monetary easing very carefully,"
said after the council meeting at a press conference the governor of the Czech National Bank Aleš Michl and explained that everything will depend mainly on the development of the crown exchange rate next to the rate of inflation. Other aspects that will be decisive in future developments, according to him, are also the impact of fiscal policy on the economy, the situation on the labor market, and the development of domestic and foreign demand.
A decrease in deposit and loan rates is expected
The cautious approach of the central bank is fully justified, said Petr Dufek, analyst of Creditas Bank for ČTK. According to him, the Czech Republic is likely to face only one or two rate cuts this year and then pause.
As a result of the decision, according to Dufek, interest rates on deposits will most likely decrease again within a few weeks and variable rates on loans will also decrease. Mortgages could eventually also become cheaper, as they mainly reflect the development of medium and long-term rates in the financial markets.
The Czech National Bank first lowered the rate in December 2023 by 0.25 percentage points. Last year, it was repeatedly by half a percentage point. In August, the bank board returned to rate cuts of a quarter of a percentage point, repeating the same step in September and November.
The bank board now in February reduced the lombard and discount interest rates to the same extent as the base interest rate. The Lombard rate, at which commercial banks can borrow money from the central bank against the pledge of securities, fell to 4.75 percent. The discount rate, to which, for example, penalties for unpaid loans are tied, is now 2.75 percent.
Sources: own questioning, CNB, CTK
