The CNB lowered the interest rate and improved the outlook for the economy, the koruna strengthened

Commercial presentation Update: 2/05/2024 17:49
Issued by: 2/05/2024, 2:33 p.m

Prague – The Banking Council of the Czech National Bank (ČNB) today reduced the base interest rate by half a percentage point to 5.25 percent. The decision was unanimous, said CNB Governor Aleš Michl. The drop in rates was in line with financial market expectations. According to Michl, the Bank Board will approach further rate reductions cautiously with regard to the development of the economy and may interrupt the process at any time. In response to the governor’s statement, the koruna strengthened and closed trading at 24.99 CZK/EUR. Today, the CNB also presented a new macroeconomic forecast, in which it improved the estimate of this year’s growth of the Czech economy to 1.4 percent and reduced the estimate of this year’s average inflation to 2.3 percent.

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. Since February, the Bank Board has accelerated the easing of monetary policy and cut rates three times by half a percentage point. At the March meeting, two members of the bank board proposed a decrease of 0.75 percentage points, today, according to the governor, such a debate did not take place at all.

In the future, according to Michl, it is necessary to proceed with lowering rates carefully and always evaluate current data on the development of the economy. He did not comment on the specific extent to which the CNB could further reduce interest rates in June. “The rate reduction process can be interrupted or stopped at any time if inflation does not develop in accordance with our prediction,” the governor emphasized. According to him, the monetary policy will remain strict in order to stabilize inflation at the level of two percent in the long term.

Given the drop in inflation and the return of year-on-year growth in consumer prices in the first quarter to normal values, further reductions in interest rates make sense, said Bohuslav Čížek from the Union of Industry. High interest rates, and therefore more robust financing costs, represent another obstacle for companies in growth or investment planning, he believes. According to him, the reduction of the interest burden is therefore beneficial from the point of view of business activity.

Today’s decision of the CNB will traditionally be reflected fastest on the market for those products whose interest rates are most tied to the central bank’s short-term rate, said Jakub Seidler, chief economist of the Czech Banking Association. He thus expects a further drop in interest rates for corporate loans. According to him, the rates for deposits will also decrease in line with the decrease in the main rate of the CNB. The decision may not have any appreciable effect on mortgage rates, he said.

Capitalinked.com analyst Radim Dohnal has the same opinion on the development of mortgage interest rates. “The decrease in CNB rates should typically be reflected in mortgage rates within a few days. However, it will not be reflected this time, as mortgage rates have been falling for months in anticipation of any decreases from the CNB,” said ČTK.

Today, the CNB also improved its estimate of the development of the Czech economy compared to the February forecast. While in February this year’s gross domestic product growth was expected to be 0.6 percent, it is now 1.4 percent, as is the Ministry of Finance. The CNB reduced the estimate of average inflation to 2.3 percent from February’s 2.6 percent. The average exchange rate of the crown is expected to be 25.10 CZK/EUR this year, in February it expected 24.60 CZK/EUR. Next year, the CNB expects a slight strengthening of the koruna to an average exchange rate of CZK 24.80/EUR.

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