Czech National Bank may raise rates as inflation accelerates

The Czech National Bank (CNB) is expected to raise its base rate, currently at 3.75%, in the near future, according to economists. The reason is that inflation in Czechia is picking up again. For borrowers, this means mortgages and other loans could become even more expensive.

Inflation: the temporary factors have run out

Not long ago, annual inflation was holding below 2%. It was helped by cheaper food and by the government’s decision to remove the renewable energy charge from households and companies from January and pay for it from the state budget. But, as analysts point out, these factors are temporary.

Back in September, core inflation, which excludes volatile food and fuel prices, rose above 3%. Services were getting more expensive at a pace well above 4%, and price growth for goods accelerated too. According to the Czech Statistical Office, overall prices rose by 2.4% year on year in October. The annual rate slowed slightly compared with September, but prices rose by 0.4% over the month. Economists see this as a temporary fluctuation and expect the acceleration to continue.

The effect of scrapping the charge for “green” energy will disappear at the turn of the year, and food is unlikely to keep getting cheaper. It is already getting more expensive on global markets, especially grain, vegetable oils and sugar. Rising energy prices will add to this. “Another small rate rise from the CNB would simply fit the situation,” says Petr Dufek, chief economist at Banka Creditas.

Mortgages are already close to 6%

Analysts acknowledge that higher rates will most likely make mortgages and other loans even more expensive. Mortgage rates on offer are already approaching 6%, the highest since January 2024. Together with high property prices, this is keeping a growing number of people from buying an apartment or house.

This year, the CNB initially kept its base rate at 3.5%. In June it raised it by a quarter of a percentage point to 3.75% and left it there in August and September.

Risks: energy, the koruna and government spending

Economists name the main threat as the escalating conflict between the US and Iran and the situation in the Persian Gulf. Expensive energy could gradually feed into companies’ costs and then into prices for consumers. “The energy shock from the war in Iran has been going on for so long and is gaining such strength that it will inevitably start to spread to the rest of the economy,” warned Investika analyst Vít Hradil.

It is not only about energy. Hradil noted that inflationary pressure in the Czech economy was already elevated before the conflict began, above all in services and the property market. In his words, there is also a risk of “self-sustaining, generalized inflation panic” that needs to be nipped in the bud.

He also pointed to rising rates abroad. If the CNB, as one of the few central banks, did not raise rates, the koruna could weaken, which would make imported energy even more expensive. Another inflationary risk is rising government spending.

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

Around Prague, based on reporting by novinky.cz