The base interest rate remains at seven percent, despite high inflation

At Thursday’s monetary policy meeting, the Czech National Bank (ČNB) Board decided to keep the current base interest rate at seven percent. The rate has been at this level since June last year. The central bank is not raising the interest rate even though inflation is still high in the Czech Republic, reaching 15.8 percent year-on-year in December.

Two other rates also remained unchanged. The discount rate is six percent, and the Lombard rate is eight percent. The Lombard rate is the percentage rate at which commercial banks can borrow money from the central bank against the pledge of securities. For example, penalties on defaulted loans are attached to the discount rate.

“At the same time, the Bank Board decided that the CNB will continue to prevent excessive fluctuations in the exchange rate of the koruna,” the central bank said in a brief press statement.

According to Ebury’s Chief Commercial Officer, Tomáš Kudla, the debate on a possible interest rate hike could be triggered by a significant rise in inflation in January. “It was the absence of January inflation data that was probably one of the arguments for the current decision of the board,” he told Novosti.

A missed opportunity?

According to Martin Gürtler, an analyst at Komerční banka, the CNB should have moved on to the next rate hike a long time ago. “As a result of the current wait-and-see policy, we think the board missed the ideal moment for another rate hike and, therefore, for an earlier return of inflation to the 2% target,” Gürtler said.

Martin Novák, the chief analyst at Broker Consulting, sees it the other way around. “I take a similar view to the board members, namely that a rate hike could, on the contrary, put unnecessary pressure on the economy and potentially deepen the recession,” he said.

Thursday’s CNB meeting was the last for Deputy Governor Mark Mora and board member Oldřich Dědek. Both will see their terms expire on February 12 and will be replaced on the board by Jan Procházka, director of the Export and Guarantee Insurance Corporation (EGAP) and coordinator of the National Economic Council of the Government (NERV), and Jan Kubíček, head of the National Budget Council office.

Interest rates on bank deposits and loans are based on central bank rates. Higher interest rates make it more expensive for businesses to borrow for investments and operations, while households face more expensive loans for housing.