Czech central bank tipped to increase interest rates

Czech central bank, photo: ŠJů, CC BY 4.0

According to many analysts and economists, the Czech central bank is now on the verge of raising interest rates, a move that has not been seen for almost a decade. We look at the likelihood of such a move this week and in the weeks to come.

Czech central bank, photo: ŠJů, CC BY 4.0
A head scratching question for many – when did the Czech National Bank last raise interest rates. The winning reply would be in the midst of the last boom in 2008 when the rate was raised to 3.75 percent.

In the meantime, rates have been cut and cut till they at the current rate of 0.05 percent they can hardly go any lower and the only way is up. In spite of that, the Czech central bank more or less threw interest rates out of the economic toolbox when it brought in its sustained low crown policy.

That low crown regime was consigned more or less to the toolbox scrapheap in April this year when the crown was allowed to float and interest rates are now back again in the spotlight. So is the level of the Czech crown, which has in recent days has strengthened and has been hovering at or around 26 crowns to the euro. An increase in interest rates would likely mean even fewer crowns to the euro.

In fact, many analysts and economists are betting that the bank board meeting on August 3 will see a raise in interest rates and a change in rates for the first time since they started flat lining at the current level from November 2012.

Jan Bureš is Chief Economist at Patria Finance. We asked him how likely an interest rate rise now appears to be.

"I think it is quite likely that the interest rate is quite likely to be raised already on Thursday. In favour of raising interest rates, I think is a new forecast of the Czech National Bank which confirmed the old one and the necessity of an interest rate hike in the first quarter of this year.

"Besides that, I also think that the increasing price on the property market might be another factor that might play in favour of the hawks on the board.

Jan Bureš, photo: Tomáš Adamec
"On the other hand, there is one strong argument for being patient and that is the European Central Bank (ECB). The ECB is staying on holding with its strategy and with negative interest rates and starting the hiking cycle in the Czech Republic much earlier than the ECB could cause a more significant strengthening of the Czech currency and could have a much more significant impact on tightening the monetary conditions than probably the Czech National Bank would like to see.

"So, therefore, one cannot exclude that the Czech National Bank could postpone still the first interest hike till the autumn, till September or maybe even a bit later. But personally, I think there is a very high probability that it can happen this week as well."