Czech National Bank cuts key interest rate to 4.25%

The Czech National Bank (ČNB) has lowered its key interest rate by a quarter of a percentage point to 4.25%, marking the lowest level since early February 2022. This move, expected by financial markets, follows a similar rate cut in August. The Czech crown showed little reaction to the decision, remaining stable.

The ČNB Bank Board’s decision was supported by six of its members, while one member advocated for a larger cut of half a percentage point, bringing the rate to 4%. Despite the reduction, the Board reiterated its commitment to maintaining a strict monetary policy to ensure long-term inflation aligns with the central bank’s 2% target.

“Inflation has remained near our 2% target since the beginning of the year, and price stability continues in the country. However, the fight against inflation is not yet over. In the long run, monetary policy remains tight,” said ČNB Governor Aleš Michl during a press conference. He emphasized that while the process of lowering rates could be paused or halted at any time, the Czech economy is still gradually recovering and performing below its full potential.

Michl cited the reduced inflation risk outlook as a key factor in the decision to cut rates. He noted that while inflation is trending down, core inflation—especially in services—remains elevated. “The vast majority of the council agreed that caution is needed,” Michl said, adding that the CNB would keep its options open, making decisions based on updated forecasts and data.

Market analysts viewed the move as expected. “The quarter-point reduction was in line with market expectations, as several Board members had signaled support for this step in recent weeks,” said Radomír Jáč, an analyst at Generali Investments. Vít Mikušek, an analyst at Raiffeisenbank, also noted that the Czech crown stayed steady at CZK 25.10 per euro following the announcement.

Petr Dufek, an analyst at Banka Creditas, pointed out that the ČNB’s decision was influenced by significantly lower inflation this year. He added that inflation is now close to the 2% target and that the bank is in no rush to lower rates further, particularly due to lingering inflationary pressures in the services sector.

Despite the rate cut, experts caution that it will not immediately translate to lower mortgage rates. “There is still strong demand for mortgages, and banks are under no pressure to lower rates,” said Michael Opočenský, an analyst at OVB Allfinanz.

According to Jáč, the full effect of the ČNB’s rate cuts this year will likely be felt in the first quarter of 2025. Mortgage rates, he explained, are influenced not only by the ČNB’s repo rate but also by long-term interest rates and government bond yields.

Source: CTK