As of last week, the main interest rate of the CNB stood at 5.25 percent, the lowest since the beginning of May 2022. However, Governor Aleš Michl also stated that the Bank Board will approach further rate cuts more cautiously.
His words reflected an update of the central bank’s forecast, according to which interest rates will be significantly higher this year and next year than the CNB predicted in the winter. The koruna also reacted to this outlook, which, after the bank board meeting, looked below the psychologically significant threshold of 25 crowns per euro for the first time since February.
The CNB prediction estimates that the three-month interbank rate (PRIBOR), which the central bank uses as a proxy for its main rate, should fall to 4.28 percent in the fourth quarter. The previous forecast from February predicted a figure of 2.93 percent.
The minutes of the May 2 meeting, published on Friday, show that members of the bank board agree with the outlined trajectory of interest rates, or would prefer a slower decline in rates, such as Vice Governor Eva Zamrazilová. Bank board member Karina Kubelková spoke out for a “cautious and gradual” decrease in rates.
Two council members who previously voted for a more drastic reduction in rates by 0.75 percentage points – Tomáš Holub and Vice Governor Jan Frait – mentioned just such a step as a possible option at the last meeting. In the end, however, they sided with the majority, and the Bank Board voted unanimously to cut rates by 0.5 percentage points.
“Developments since the last session speak rather in favor of a slower rate decline,” Holub said, according to the minutes.
Slightly pro-inflationary risks
Central bankers spent much of the debate ahead of the rate vote discussing the structure of inflation, particularly as services prices continue to rise faster than goods, which is not entirely normal. According to Tomáš Holub, the economy is in the phase of “putting out the inflationary fire”, and therefore the faster growth of service prices can be seen as an echo of the era of increased inflation.
Photo: Czech National Bank, Seznam Zpravy
The Czech National Bank expects the demand for mortgages to accelerate.
The discussion also touched on the real estate market, where the central bank expects the demand for mortgage loans to accelerate this year. According to Vice-Governor Zamrazilová, the reason behind the increase is precisely the delayed demand for real estate. Consumers could now start fulfilling this, which can push up the prices of services – rent.
As for pro-inflationary risks, according to Kubelková, the possibility remains that the key central banks, the European Central Bank and the US Fed, will reduce interest rates more slowly. Vice-governor Frait mentioned the employees’ demands for faster wage growth, while Councilor Jan Kubíček drew attention to the relatively slow pace at which the government wants to reduce the deficit of public finances.
These points are highlighted by the CNB’s forecast itself, which the members of the bank board had as one of the main bases for their decision-making. The material talks about uncertainties, among which, in addition to those mentioned, the members of the bank board also include the speed of cooling of prices in services or the development of foreign demand for Czech exports. 80 percent of the Czech economy is driven by exports.
