The board of the Czech National Bank (CNB) recently cut the base interest rate by half a percentage point to 4.75%. This decision, which was supported by the majority of the board members, is an attempt to stimulate the Czech economy, although rates still remain restrictive in relation to inflation.
The CNB had begun reducing rates last December, when it cut the base rate by a quarter of a percentage point to 6.75 %, after a one-and-a-half year period in which rates had remained unchanged at 7%.
Governor Aleš Michl stated that future rate cuts would be considered with caution, slowing or suspending them if necessary. Michl emphasised that current rates remain restrictive in relation to inflation and that future decisions will be based on new economic data. Furthermore, he emphasised that the fight against inflation is not over and that restrictive monetary policy will continue to stabilise inflation close to the 2% target.
According to XTB analyst Tomáš Cverna, the half-percentage point cut slightly surprised the market, causing the koruna to weaken, which closed at CZK/EUR 25. Michl identified rising wage demands in the private and public sector as one of the risks of rising inflation. However, he noted that despite the 7 % growth in average wages in the first quarter, there is no domino effect between wages and inflation. Other risks include inertia in service price growth and a pick-up in lending activity in the housing market.
Vit Hradil, analyst at Cyrrus, said that the CNB acted understandably by choosing the bolder of two similar options, namely to lower the base interest rate by half a percentage point. According to Hradil, interest rates in the Czech Republic remain restrictive and, if inflation is not reduced, the CNB could stop or reverse the rate drop. However, he believes that the Czech economy needs a boost and that lower interest rates could facilitate cheaper loans, contributing to economic growth.
Other experts shared similar views. Radomir Jáč of Generali Investments said that the half-percentage point cut was not a complete surprise, as board officials had already admitted this possibility. Petr Dufek of Bank Creditas emphasised that monetary policy would remain restrictive even with a sharp rate cut, due to high inflation in services and rapidly rising wages. Tomas Kudla, Ebury’s commercial director for the Czech Republic, added that the cut reflects the need to support a still vulnerable economy, but also suggested caution due to recent wage growth and other economic data.
David Marek of Deloitte said that the CNB is in line with its current forecast, although it is about 50 basis points behind Deloitte’s model. David Eim of Gepard Finance noted that today’s rate cuts may not make a big difference, as mortgage rates have remained stagnant at around 5% despite previous cuts. According to Eim, the price of mortgages has taken its own direction in recent months, making the cuts in base interest rates less influential on them.
Michael Opočenský of OVB Allfinanz added that despite the base interest rate cut, this will not automatically lead to cheaper mortgages. Banks use other factors to determine interest rates on mortgages, and recently these rates have not fallen, partly due to fluctuations in resource prices.
Lucie Drásalová, a mortgage analyst at Sirius Finance agreed with Michael that it can be assumed that the big banks will want to keep the current rates until 1st September, when the amendment of the Consumer Credit Act comes into force, and thus when the legislation will allow them to partially reflect in the calculation of the costs incurred in repaying mortgages outside the fixing period. He also stated that the year will end with rates around 4.25 %. Jana Vaisova of FinGO noted that many customers are ending their low rates set at around 2%, and banks are not rushing to cut rates significantly.
Finally, Daniel Horňák, mortgage specialist at Bidli, said that much will depend on the price of money on the interbank market, which is still significantly higher than three months ago. This will have an immediate impact on interest rates on savings accounts, incentivising people to invest in other forms of savings, such as real estate.
In conclusion, while the CNB continues to closely monitor economic and inflationary developments, analysts remain divided on the long-term effects of rate cuts.
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