The ČNB left the base interest rate at seven percent

At its last monetary policy meeting of the year, the Czech National Bank’s (ČNB) Board decided on Wednesday to leave the key interest rate at seven percent. The rate has thus remained at the same level since the end of June.

The seven-member board also left two other rates unchanged: the discount rate remains at six percent and the Lombard rate at 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 non-performing loans are linked to the discount rate.

“At the same time, the Bank Board decided that the ČNB will continue to prevent excessive fluctuations in the exchange rate of the koruna,” the ČNB said in a press release.

Tomáš Kudla, Ebury’s chief commercial officer, said the board’s decision was expected given the long-standing rhetoric of its members and signals of a slowdown in the Czech economy.

However, he said a future rate hike cannot be ruled out. “The Czech National Bank is not helped by the government’s loose fiscal policy, which has completely resigned itself to any effort to address the balance between state budget revenues and expenditures meaningfully. At the same time, living on high debt increases inflationary pressures in the domestic economy and may force the ČNB to raise rates unexpectedly at a future meeting, even in a situation of economic downturn,” Kudla believes.

Jaromír Gec of Komerční banka has a different view. He thinks the base rate will remain at the same level until August next year when it will decrease gradually.

ČNB Governor Aleš Michl has warned at previous board meetings that rates will remain elevated for a more extended period until inflation can be fully brought under control. In November, the rate of price growth was 16.2 percent.

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 investment and operations and for households to borrow for housing.