Czech National Bank

William Malcolm

CNB Raises Key Rate To 0.5% To Curb Inflation

For the first time since February 2020, the Bank Board of the Czech National Bank has raised interest rates. The key interest rate, on which the interest rate on commercial loans is derived, rose by 0.25 percentage point to 0.5 percent. The reason for the increase in rates is mainly concerns about rising inflation related to the economic recovery.

According to CNB Governor Jiří Rusnok, the central bank’s monetary policy has thus entered a phase of raising interest rates. According to him, this can be expected in the second half of the year. According to economists, the CNB could raise rates twice more this year. According to banks, raising rates will boost the rise in the cost of loans, especially mortgages.

Interest on bank deposits and loans is derived from central bank rates. Businesses have higher interest rates on investment and operating loans, and more expensive housing loans on households.

“It is possible that we will raise rates at each subsequent monetary meeting, which will bring us to the level that the forecast predicts … But I am not saying that this will be the case. And I hope that it will not be necessary,” Rusnok said. The CNB’s current macroeconomic forecast for May envisages a roughly threefold increase in interest rates by the end of this year.

Rusnok also said that the CNB Council’s actions are affecting inflation for a year to a year and a half. In this context, he pointed out that it is not possible to have economic growth of three to four percent and low-interest rates. According to Rusnok, the council now does not doubt that the pandemic and its consequences in terms of various restrictions are in decline. “And that happened a little earlier than we thought. And it happens even faster, “he said.

Today, four members of the Bank Board voted in favor of today’s decision to increase the key interest rate by 0.25 percentage points. One of the board members even voted in favor of raising the key interest rate by 0.5 percentage points. Two members were then in favor of leaving interest rates unchanged.

The reactions of the largest Czech banks show that an increase in central bank interest rates will support the rise in prices of loans, especially mortgages.

The Hungarian central bank was the first in the region to start raising interest rates after the pandemic, raising the key interest rate by 0.3 percentage point to 0.9 percent on Tuesday.

The CNB also raised the Lombard rate today by 0.25 percentage point to 1.25 percent. The Lombard rate is the percentage rate at which commercial banks can borrow money from a central bank against a pledge of securities. It left the discount rate, for example, which is linked to penalties for non-performing loans, unchanged at 0.05 percent.