Mortgages and loans in the Czech Republic will become more expensive. The CNB has taken a strong step against rising inflation

TASR , Pravda , Eko 01.10.2021 19:13

The Bank Board of the Czech National Bank (CNB) significantly raised the key interest rate, moving it from 0.75 percent to 1.5 percent. This means a rise in the price of loans and mortgages, as interest rates on commercial loans, including housing loans, are derived from it.

. The Bank Board last raised the base rate at one meeting by more than 0.25 percentage points in 1997. The current rate has only been in force since 6 August this year.

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In addition, the Bank Board decided to increase the Lombard rate from 1.75 percent to 2.5 percent, while the discount rate increased the rate from 0.05 percent to 0.5 percent. The newly set interest rates are valid from October 1.

The CNB is trying to combat the rise in the price level by raising rates. Year-on-year inflation accelerated to 4.1 percent in August, the strongest rise in consumer prices since November 2008.

in the form of a very tense labor market and a loose monetary policy, the CNB has been pushing interest rates to normalize since June, ”said Pavel Peterka, the chief economist of the Roklen Group. He added that due to the amount, strength and combination of pro-inflationary pressures, an increase in interest rates was expected. However, the increase in the two-week repo rate by 0.75 percentage point has already surprised the markets.

What about the markets?

Markets expected rates to increase by 50 basis points. Even in this case, it would be the most significant increase since 1997. “The increase of 0.75 percentage points thus represents the basis for strengthening the koruna in the coming weeks. In the 12-month horizon, the markets expect another five rounds of rate hikes, which should move the two-week repo rate to 2.5 percent, “added Peterka.

He said the koruna’s exchange rate will be crucial in the medium term the CNB’s November meeting, where interest rates are expected to rise further by 0.25 to 0.75 percentage points. Peterka expects that the koruna could fall below CZK 25 per euro in 2022.

A drastic step

Czech economist Lukáš Kovanda talks about the CNB’s drastic step, which dispels any possible suspicion that it would be subject to political pressure. According to the economist, the Ministry of Finance pressured the bank, on the contrary, to reduce the rate by less than 0.5 percentage point, if at all.

and that it will make every effort to dampen the effects of inflation, “Kovanda writes in his commentary.