William Malcolm

CNB Holds Rates Steady, Raises Outlook

The Czech National Bank left interest rates unchanged today. The primary interest rate, on which the interest rate on commercial loans is derived, remains at 0.25 percent. The CNB improved its forecast of economic development this year while worsening its estimate for next year. Newly, it expects economic growth of 2.2 percent this year and growth of 3.8 percent next year.

The CNB stated that market interest rates’ stability was consistent with the new forecast, followed by their gradual rise from around the middle of this year. “The initial stability of rates reflects the need for a further relaxed economy due to the effects of the pandemic,” CNB Governor Jiří Rusnok said today.

Economists expect that the bank could start raising rates later in the second half of the year. For example, according to ING chief economist Jakub Seidler, the recovery of the Czech economy will accelerate at the end of the second quarter, which will give the CNB enough time to raise rates in the second half of the year, probably in November or December.

“If the development is according to our assumptions, then sometime around the middle of the year, the situation could improve. Then we expect that there will be room for some gradual steps in the direction of normalization of interest rates,” Rusnok said today.

However, according to the CNB Governor, the risks and uncertainties regarding the development envisaged in the new forecast are significant and skewed in the direction of a slower fading of the pandemic’s effects. The central bank considers the more prolonged closures of the economy in the Czech Republic and abroad to be the main risk and the consequent deterioration in companies and households’ financial situation. This would then lead to a prolonged economic downturn.

The forecast also states that headline inflation should be two percent this year and 2.2 percent next year. “The gradual recovery of the economy will cause the increase in inflation, but at the same time, it will be dampened by the strengthening koruna … The strengthening of the koruna then reflects the resilience of the export industry during the second wave of the pandemic,” Rusnok said.

According to CNB estimates, the koruna’s exchange rate should strengthen to an average of CZK 25.80 / EUR this year and CZK 24.90 / EUR next year.