Czech National Bank cuts key interest rate to 6.75 %
Economic commentary by Jakub Seidler, Chief Economist of the CBA
As expected, the CNB cut its main interest rate by a quarter percentage point to 6.75 %. This is the first rate change since June 2022, when the Board raised it from 5.75 % to 7 %. The last time the CNB cut rates was after the pandemic outbreak in March 2020 (from 2.25 % to 1 % and then 0.25 %, where they remained until June 2021, Chart 1).
The outlook for inflation next year already allows monetary policy to start easing, despite the uncertainty of the January revaluation, which will largely determine inflation next year. According to the current analyst consensus, full-year inflation will be around 3 % in 2024, but even in the event of a surprise higher price increase, the current level of interest rates has been too restrictive. Analysts expect the CNB's main rate to be around 4 % at the end of next year, but the market is currently convinced of an even more significant decline, down to the 3 % mark. However, this seems too low an expectation at the moment given earlier comments from CNB officials about a gradual rate cut, even though the CNB's own November forecast has the headline rate at 3.4 % for 4Q24.
The rate cut will have minimal impact on mortgage rates as longer term rates have already factored in the CNB rate cut and whether it happens a month earlier or later is not so crucial for these rates. A far more significant effect in this regard has been the market's recent reassessment of the speed of the major central banks' interest rate cuts next year due to lower-than-expected inflation and less favourable economic prospects, to which longer maturity rates have responded with a more significant fall. This also affected longer-term rates in the Czech Republic, which fell by more than one percentage point compared with October and are thus at their lowest level since March 2022 (see Chart 2). It is these developments in recent weeks that have been key to the outlook for mortgage rates next year and foreshadow a potentially faster decline than previously assumed.
The outlook for inflation next year already allows monetary policy to start easing, despite the uncertainty of the January revaluation, which will largely determine inflation next year. According to the current analyst consensus, full-year inflation will be around 3 % in 2024, but even in the event of a surprise higher price increase, the current level of interest rates has been too restrictive. Analysts expect the CNB's main rate to be around 4 % at the end of next year, but the market is currently convinced of an even more significant decline, down to the 3 % mark. However, this seems too low an expectation at the moment given earlier comments from CNB officials about a gradual rate cut, even though the CNB's own November forecast has the headline rate at 3.4 % for 4Q24.
The rate cut will have minimal impact on mortgage rates as longer term rates have already factored in the CNB rate cut and whether it happens a month earlier or later is not so crucial for these rates. A far more significant effect in this regard has been the market's recent reassessment of the speed of the major central banks' interest rate cuts next year due to lower-than-expected inflation and less favourable economic prospects, to which longer maturity rates have responded with a more significant fall. This also affected longer-term rates in the Czech Republic, which fell by more than one percentage point compared with October and are thus at their lowest level since March 2022 (see Chart 2). It is these developments in recent weeks that have been key to the outlook for mortgage rates next year and foreshadow a potentially faster decline than previously assumed.
Disclaimer: Text translated automatically, excuse any imperfections.