Central bankers have put on rose-colored glasses: the average interest rate fell by another 0.5 percentage point

The fall in interest rates, which was started by the central bank last December, continues. Compared to the previous period, when these rates stood at seven percent for a year and a half, this is undoubtedly good news for the domestic economy. It fell from 5.75 to 5.25 percent and thus reached its lowest level since early May 2022.

According to Bohuslav Čížek from the Union of Industry, high interest rates represented an obstacle for companies in growth or investment planning, he thinks. Therefore, the reduction of the interest burden is beneficial from the point of view of business activity, according to him.

The primary goal remains to curb inflation

The rates mentioned are still above the current average inflation rate. The rate of inflation expressed as an increase of the consumer price index to the same month of the previous year reached only 2 percent in March. And that is also the target to which the banking board wants to approach even in a longer time horizon. For comparison: last March, according to the data from the Czech Statistical Office, it was still at the level of 15 percent.

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"Inflation should stabilize at around 2 percent in the long term,"

noted Governor Aleš Michl at the May press conference. However, he also added that the fight against inflation is certainly not over.

This is agreed by the chief economist of the Comfort Finance Group, Vladimír Pikora.

"For the central bank, it is crucial that inflation is within the target of the Czech National Bank. The question is whether it will stay there. If it doesn't significantly lower rates, the crown may not have to weaken and import inflationary pressures. Welcome the influence of the rising prices of services and don't fight with it. This increases our wages to be able to converge with Western Europe,"

said LP-Life Pikora.

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Rates should continue to drop, analysts say

Although Michl claims that the banking council will base each of its future meetings on current economic development data and cannot guarantee that rates will continue to fall, most experts think the opposite.

"It can be assumed that the Czech National Bank will continue to lower interest rates at subsequent meetings, leading to a decrease in domestic bank interest rates, both for deposits and loans,"

The future development is estimated by Radomír Jáč, an analyst at Generali Investments, as informed by the Czech Press Office.

Jakub Seidler, an analyst at the Czech Banking Association, believes that the decisions of central bankers traditionally have the fastest impact on the market for those products where interest rates are most closely tied to the short-term rate of the Czech National Bank.

Interesting properties attract investors' interest

The current situation therefore also favors other forms of investment than we have been largely used to.

"The falling interest rate poses significant challenges for Czech savers and investors. Not only does it translate into the interest rates on savings accounts, but also the returns on bond products and investment platforms are decreasing. As a result, people are looking for alternative ways to protect their savings from losing value," 

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According to a press release from the director of the investment platform InvestBay, Daniel Rajnoch, golden times can be expected especially in the real estate market. Th Mainly due to the decrease in mortgage prices, which should not occur only this year but also in the coming years.

"From our April survey 'How Czechs invest', it emerged that Czechs rated real estate as the highest safety value for investments. 64 percent of respondents consider them to be relatively safe. Conversely, most Czechs marked cryptocurrencies as relatively risky. This trend shows that in times of low interest rates, investors prefer assets with long-term value and stable returns. Given that interest rates continue to decrease, it is likely that this trend will intensify even more,"

Rajnoch said.

We bounced back from the bottom

The domestic economy is reviving and economists' expectations are high. This is also reflected in the bolder statements of bankers. The following sentences by Aleš Michl, which he stated after the May meeting of the board, would therefore also have been hard to imagine just a few months ago.

"The Czech economy bounced back from the bottom at the end of last year. Growth continues this year. Yet it still operates below its potential."

Sources: CNB, CTK, own inquiry