Czech National Bank raises rate to 4%: will mortgages get pricier

The Czech National Bank (CNB) on Thursday raised its key interest rate by 0.25 percentage points to 4%. It is the second hike this year, following one in June. The decision matched analysts' expectations, who had pointed to persistent price pressures.

The decision passed by the narrowest of margins

Four of the seven bank board members voted for the increase, while the other three wanted to keep the rate at 3.75%. The main concerns are high energy prices and strong domestic demand, which could push inflation higher in the coming months. By making loans more expensive, the central bank is trying to curb spending by households and companies and slow price growth.

At a press conference, CNB Governor Aleš Michl stressed that the hike does not mark the start of a series of increases, but is rather a “fine-tuning” of monetary policy. “Further steps will depend on our assessment of new economic data. The central bank’s goal is to keep inflation low over the long term,” he said.

Board member Jakub Seidler had already spoken in favor of a hike before the meeting. In an interview with Reuters in late October, he said he was leaning toward a quarter-point increase because of expensive energy and resilient domestic demand, but he too does not see it as the start of a series of hikes. CNB Vice Governor Jan Frait told Bloomberg that the arguments for raising rates were fairly strong, but reminded that borrowing is already getting more expensive due to rising market rates, so further intervention might not be needed.

What changes for mortgages

Higher rates could gradually make mortgages more expensive, but banks will not automatically raise their rates by 0.25 points. Mortgage rates depend primarily on long-term market rates and expectations about where they are heading.

If you already have a mortgage with a rate fixed for several years, your monthly payment will not change for now. The increase will be felt mainly by those who are only planning to take out a new mortgage and those whose fixation period is ending.

Babiš is against, Michl stays out of politics

The decision comes at a time when the government of Andrej Babiš (ANO) is promising people cheaper mortgages. Ahead of last year’s elections to the Chamber of Deputies, ANO campaigned under the slogan “Vote for cheaper mortgages,” and in early October Babiš assured voters that the government would keep that promise. However, the cabinet does not directly set mortgage rates.

During interpellations in parliament, the prime minister came out against the hike. Responding to an opposition MP, he said he had expected her to protest loudly: “We protest against yet another interest rate increase that will make our mortgages more expensive again.” Babiš also reminded the chamber that, in his words, Czechia has one of the lowest inflation rates, and he criticized the profits of commercial banks, saying he had told them their interest margins were “disgusting.”

Michl declined to respond when asked about the prime minister’s criticism: “We do not comment on political statements.” He said the CNB is focused on its main task of maintaining price stability and fighting inflation.

The CNB’s forecast has worsened

The bank also published a new forecast. According to the CNB:

— this year the economy will grow by 1.7% (2.2% was expected in August), and inflation will be 2.1% (previously 2%);
— next year GDP growth will be 2.5%, slightly below earlier expectations, while inflation in 2027 will accelerate to 3.2% (2.5% was forecast in August);
— in 2028 economic growth will stay at 2.5%, while inflation will slow to 2.3%, approaching the central bank’s 2% target.

Savings could become more rewarding

For those with savings accounts, a rate hike is more likely good news: banks may gradually offer higher yields. Much will depend on their decisions and on how hard they want to compete for customers’ money. Michl called the current period a favorable one for saving: “Now is the time to save.” He said the CNB wants to encourage people to build up savings and, over the long term, to support positive real interest rates, meaning returns above inflation. When calculating real returns, taxation of income must also be taken into account.

Jan Koriney, commercial director of the Artesa savings cooperative, believes that not only savings accounts but also term deposits with a pre-agreed rate could become more attractive. In his view, it is worth looking not only at the nominal rate but also at the real return after inflation and tax. Bohumil Žitný, strategist at Žitný a partneři, adds that bank terms can differ widely: some will raise rates faster, while others will keep the higher rate only for new clients or for deposits up to a certain limit. Investing in stocks, he says, can still bring higher returns, but at the price of greater risk and fluctuations in value.

Around Prague guide on the topic: Mortgages in Czechia for foreigners: who qualifies and how much of your own money you need

Around Prague, based on reporting by seznamzpravy.cz