Czech National Bank

William Malcolm

CNB lowers interest rate to 4.75%

The Banking Council of the Czech National Bank (ČNB) today reduced the base interest rate by half a percentage point to 4.75 percent. Jakub Holas, director of the CNB’s communications department, informed about it. The rate reached its lowest level since the beginning of April 2022. The CNB’s decision slightly surprised the financial market, analysts agreed. Before the meeting of the Bank Council, analysts said that there were arguments for reducing rates by half or even only a quarter of a percentage point.

The press conference of the bank board will take place at 15:45. CNB Governor Aleš Michl will explain the reasons for today’s decision and publish the voting ratio in the Bank Board.

In addition to the base interest rate, the Bank Board reduced the Lombard and discount interest rates to the same extent. The Lombard rate, at which commercial banks can borrow money from the central bank against securities, is now 5.75 percent. The discount rate, to which, for example, penalties for defaulted loans are linked, fell to 3.75 percent.

Development of the CNB base interest rate.

The CNB started the decline in interest rates last December, when in the first step it lowered the base interest rate by a quarter of a percentage point to 6.75 percent. Before that, rates were unchanged at seven percent for a year and a half. In February of this year, the CNB accelerated its rate reduction, when it went for a drop of half a percentage point, and repeated the same step in March and May.

Interest rates on bank deposits and loans depend on central bank rates. Higher interest rates bring more expensive loans for investments and operations to businesses, and more expensive housing loans to households. At the same time, however, with higher interest rates, the appreciation of deposits on accounts increases.

Analysts: The CNB’s decision slightly surprised the financial market

The CNB’s decision to cut interest rates by half a point slightly surprised the financial market, analysts agreed. The koruna reacted to the publication with a strong weakening against the euro, when immediately after the announcement of the rates it rose above the level of 25 crowns per euro. A few minutes after publication, part of the losses were erased and it is around CZK 24.97 per euro, XTB analyst Tomáš Cverna told ČTK at 2:40 p.m.

“The reduction of the CNB’s repo rate by half a percentage point is more significant than the financial market expected, which counted on the banking board to reduce interest rates by a quarter of a percentage point,” Generali Investments analyst Radomír Jáč said. According to him, the further reduction of interest rates by half a percentage point is not a complete surprise. The representatives of the bank board admitted this possibility, the argument is, for example, the development of the koruna exchange rate or falling core inflation, he added.

Apparently, the opinion prevailed that even with such a drastic reduction in rates, the monetary policy will remain sufficiently restrictive, even in light of persistently high inflation in services and faster growing wages, Banka Creditas analyst Petr Dufek pointed out. And as you can see, according to him, even the weakening of the crown in June did not help to slow down the progress.

The reduction of rates by half a point reflects the need to support the economy, which remains relatively vulnerable, says Ebury’s sales director for the Czech Republic, Tomáš Kudla. On the contrary, recent wage growth and other economic data indicate caution, but the earlier strengthening of the koruna and other factors led the CNB to maintain the rate of reduction, he said. “We will see how the markets react to the decision, even following the press conference, however, a more significant reduction in rates may cause pressure to weaken the koruna,” he pointed out.

From the point of view of Cyrrus analyst Vít Hradil, the CNB behaved understandably today when it chose the bolder of two similar options. According to him, interest rates in the Czech Republic continue to have a restrictive effect. If, however, it should turn out in the near future that inflation has not yet been definitively defeated, the CNB has the option to stop the rate drop at any time, or even reverse it in the extreme case, he said. However, the Czech economy currently needs a boost and cheaper loans can help it, he added.

According to Deloitte analyst David Marek, the CNB is now more or less in line with its current forecast. Compared to our model, however, it is still about 50 basis points behind interest rate cuts, he noted.

Analysts: The CNB’s decision to cut rates may not immediately make mortgages cheaper

The CNB’s decision to cut interest rates by half a percentage point may not immediately make mortgages cheaper, analysts contacted by ČTK agreed. On the contrary, according to them, interest on deposits will probably fall more significantly. 

“Although it is true that the setting of key interest rates is one of the most important parameters for the economy, it is also true that the price of mortgage loans has been living a bit of a life of its own in the last few months,” David Eim, vice chairman of Gepard Finance, told ČTK. According to him, mortgage rates are more or less stagnant and, despite previous reductions in key interest rates, remain around five percent. So he doesn’t think today’s rate cut will change anything.

“Banks are guided by other indicators when determining interest rates on mortgage loans,” added OVB Allfinanz analyst Michael Opočenský. They have not been reducing recently and resource prices are fluctuating. “Paradoxically, we can witness a situation where some banks have made mortgage interest rates more expensive. In general, however, we can observe a trend where banks tend to wait and look forward to the date of September 1, when the legislation will allow them to partially reflect in the calculation the costs incurred when repaying loans outside the fixation period, which are reflected in the rate today in the form of a so-called option premium,” he added.

“It is possible to speculate that the big banks will want to keep the current rates until September 1, when the amendment to the Act on Consumer Credit comes into force,” Sirius Finance mortgage analyst Lucie Drásalová agreed. According to her, after this deadline, the final rates of commercial banks will start to fall faster. “I am still convinced that we will close this year with rates around 4.25 percent,” she estimated.

For many clients, the fixation of low rates of around two percent ends this year, the banks are not coming forward with significant rate reductions, and therefore reductions cannot be expected even now, added FinGO specialist Jana Vaisová. It will depend again on the price of money on the interbank market, which is still significantly more expensive than three months ago, warned Bidli mortgage specialist Daniel Horňák. What it will have an immediate impact on, he says, is interest rates on savings accounts. So people will have much more motivation to save money elsewhere, which of course can be real estate, he noted.