Czech National Bank raises interest rate to 20-year high

The Council of the Czech National Bank (CNB) chose to raise its base interest rate from 3.75 to 4.5 percent on Thursday, to its highest level in twenty years. The move follows several increases over recent months and, according to bankers, is a reaction to rising inflation.

Czech National Bank | Photo: ČT24

This is the fourth time in a row that the Czech National Bank has chosen to raise its interest rate significantly above the standard 0.25 percent. For businesses it means that loans used for investment and operations will be more expensive. Meanwhile, households will see an uptick in mortgage interest.

Towards the end of last year, the Central Bank announced that it will continue to raise interest rates to curb the rise of inflation and Thursday’s move didn’t surprise economists questioned by Czech Radio.

Martin Gürtler | Photo:  archive of Martin Gürtler

Martin Gürtler, the chief economist at Komerční Banka, one of the country’s largest banks, said that this was understandable, because inflation rose beyond the Central Bank’s November forecast by a whole percentage point in December, while at the same time the growth of the country’s economy saw a rise in private sector wage growth and lower unemployment levels.

While the move was expected, the chief economist of the Czech Banking Association, Jakub Seidler, said that he does not expect interests rates to rise by such high margins in the future and that, based on the statements of the National Bank’s leading representatives, it is unlikely that the interest rate will exceed 5 percent. Indeed, it is likely that the bank may consider lowering its rates around the end of 2022.

Luděk Niedermayer | Photo: Filip Jandourek,  Czech Radio

The steep hike was welcomed by Czech MEP and former National Bank vice-governor Luděk Niedermayer. He told Czech Television that it shows the bank’s commitment to stopping the rise in inflation, which reached 6.6 percent in the last month of 2022.

“It is not an easy decision and it may seem hard to understand for people looking at it from the outside. A portion of the population, especially businesspeople, doesn’t understand why there are such radical increases here when the European Central Bank is not raising its interest rates at all. At the same time, those who have their savings stored in the bank, say that the interest rate is set too low, because inflation is higher.

Photo: Chris Butterworth,  Flickr,  CC BY-SA 2.0

“However, you have to realize that central bankers are looking at where inflation will be in six months' time, or a year later. It sets its interest rates based on what it believes inflation will be like then. These analyses are clearly suggesting that inflation will not fall unless interest rates are raised.”

While inflation data for January is yet to be released by the Czech Statistics Agency, the December forecasts by economists suggest that it will be higher than the 5.1 percent registered in the Eurozone. The European Central Bank has reacted very differently from the CNB, keeping its interest rate at 0 percent and expecting inflation to fall to 1.8 percent either next year or in 2024.

Tomáš Kudla, the head of Czech and Slovak trade at international finance firm Ebury, told the Czech News Agency that he expects the higher interest rates will result in the Czech crown continuing to appreciate, which is bad news for exporters.