Czech National Bank holds countercyclical buffer rate at 1.5 pct

The Czech National Bank, photo: ŠJů, CC BY 4.0

The Czech National Bank (ČNB) said on Friday it had maintained its extra countercyclical capital buffer for banks at 1.50 percent following a series of increases aimed at reining in rapid credit growth.

The Czech National Bank, photo: ŠJů, CC BY 4.0
The European Union introduced the countercyclical capital buffer as an important macroprudential policy instrument in 2014. Obliged institutions are required to create this buffer on the basis of the regulator’s instructions in periods of excessive growth in lending.

Excessive lending growth usually increases financial imbalances and leads to a rise in systemic risk. The Czech Republic is one of a handful of European countries where banks must set aside capital under this buffer.

In times of falling economic activity – accompanied by rising credit losses – this buffer should be released so non-financial corporations and households continue to have access to loans without excessively tight conditions.

A long period of record-low interest rates and strong economic growth have increased demand for household loans, especially for relatively cheap mortgages during a housing boom. The average mortgage rate rose marginally to 2.5 per cent in July, according to data compiled by the Fincentrum Hypoindex, whose figures are based on the real values of freshly agreed contracts, including refinancing. Last month the average rate stood at 2.49 per cent.

The ČNB Bank Board decided to leave the rate for exposures located in the Czech Republic at the current level at its meeting on 30 August 2018. The central bank used this rate for the first time at the end of 2015, setting it at 0.5 percent with effect from 1 January 2017.

The Bank Board decided to raise it to 1.0 percent in May 2017 with effect from 1 July 2018 and in December 2017 increased it further to 1.25 percent with effect from 1 January 2019. The latest change in the rate occurred on 17 May 2018, when the Bank Board decided to increase it to 1.5 percent with effect from 1 July 2019.

The ČNB has also introduced new recommendations that banks should follow for mortgage loans, including income requirements for borrowers that will come into effect in October. Under the change, mortgage holders should not be allowed to spend more than 45 percent of their monthly income on repayments. The central bank’s restrictions are not legally binding but are generally followed by banks.

A shortage of new flats in recent years, combined with low interest rates, have contributed to prices for new homes soaring 58 percent rise in Prague since 2015.