CNB rate hike signals 'end of the cheap mortgage'

The Czech National Bank surprised the financial markets by announcing a quarter point higher interest rate of 2.0 percent starting this Monday. The central bank governor said the board was concerned about inflationary pressures, in large part due to soaring global oil prices. But the minister of finance says the rate hike was premature. For the would-be Czech homeowner, it may spell the end of cheap mortgages.

Marketa Sichtarova, photo: www.nextfinance.cz

The cost of borrowing money just got dearer. All interest rates, both short- and long-term, are adjusted according to the two-week repo rate set by the Czech National Bank. On Monday, that rate went from 1.75 percent to 2.0 percent, the same level as in the euro zone.

"It means, take a mortgage as soon as possible."

Analyst Marketa Sichtarova of the brokerage Next Finance, says that while the central bank's move was unexpected, the markets now anticipate a second rate hike within a half-year's time:

"In fact, we have to understand the decision of the Czech National Bank as a preliminary decision, which is aimed at taming inflation in 2006. This means, the step might be repeated within several months - and it is quite clear that mortgages will become more and more expensive."

The Czech bank had trimmed borrowing costs three times this year to 1.75 percent -- an all-time low - in order to spur economic growth. The strength of the Czech currency had helped keep import prices in check. But record oil and gas prices pushed up the inflation rate to 2.2 percent in September, the highest this year. The Czech central bank's new inflation target for 2006, aims to keep the annual rate at 3 percent, give or take a percentage point.

Ms Sichtarova says that inflation remains relatively low, and so the markets were surprised by the central bank's rate hike.

"The decision of the Czech National Bank was, I would say, quite unexpected, and the reaction of the financial markets was quite huge. The interest rates immediately increased by 20 basis points."

Finance Minister Bohuslav Sobotka

Rate decisions by the national bank generally influence the economy with a delay of 12 to 18 months; Finance Minister Bohuslav Sobotka says the hike was premature.

"The latest prognosis on the Czech economy available to the Finance Ministry doesn't forecast price increases next year in the Czech Republic above the inflation rate in 2005. We expect that inflation in 2006 will settle to reach, on average, 2.5 percent by mid-year. I see no other economic parameters which would lead to increased interest rates," Sobotka said.

The increase may signal that a series of rate cuts among the largest new members of the European Union -- Poland, the Czech Republic, Hungary and Slovakia -- have come to an end: High time to take out that mortgage.