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The Czech National Bank Raised the Basic Interest Rate to 1.5 Percent

Issued 04.10.2021

The Council of the Czech National Bank (CNB) has raised interest rates sharply. The key interest rate (the so-called repo rate) was increased by 0.75 percentage point.

This rate determines the percentage at which the CNB can borrow money from banks, thereby reduce the circulation of money in the Czech economy. This is the highest increase done in a single meeting in the last quarter century. The reason for this significant intervention is strong inflationary pressure, which is higher than the CNB has predicted. In August, inflation in the Czech Republic reached 4.1 percent, while the aim is to return it to the 2 percent limit. According to the governor of the CNB, the reason for the expansionary policy has now passed and, on the contrary, interest rates need to be returned to the original level.

The basic rate affects the interest rate on consumer loans. It is therefore possible to expect a further rise in interest rates on mortgage loans. However, it is not possible to predict with certainty how much and in what time horizon interest rates will be raised, as there is no exact correlation between the basic interest rate set by the CNB and the level of interest rates for consumer loans. However, Czech leading banks have already announced a significant increase in interest rates on mortgage loans ranging from 0.3 to 0.5 percent. New rates will be valid from the beginning of the next week. Higher rates may reduce the volume of new loans, which was a record in the first half of the year, due to the low interest rates. The increase in rates will be reflected not only in newly agreed loans, but also in older loans, for which the period of fixation ends and will have to be refinanced with a new interest rate. 

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