Interest Rates on New Loans

The Bank Board left the interest rate unchanged at 3.75%. The projected rise in the interest rate to 4% was apparently not sufficient for the Bank Board, perhaps due to weaker economic growth, the strong koruna, and lower month-over-month core inflation. Added to this is a communication challenge stemming from the essentially weak growth in overall consumer prices. Inflationary risks persist, even in the context of expected stronger, but less inflationary, economic growth.

The Bank Board raised the interest rate by a quarter of a percentage point to 3.75%. Unsurprisingly, the main reason was the continued high growth in demand-driven, or “core,” inflation, which reflects stronger wage growth. However, the decision also reflects stronger credit growth and rising real estate prices. I view today’s decision as an effort by the central bank to keep consumer inflation in line with its inflation target over the longer term, which is not possible with core inflation hovering around 3%. Today’s decision reduces the risk premium—or rather, the uncertainty regarding the credibility of achieving the inflation target and the central bank’s independence. Below, I discuss further possible steps and their implications for the economy and the banking sector. If energy prices remain lower, this will reduce the likelihood of the CNB reaching a 4% interest rate. However, core inflation must lose momentum for the CNB to avoid reaching that level.

In May 2026, banks and building societies actually issued new mortgages (excluding refinancing) totaling CZK 38.1 billion.

Average mortgage rate rises to 4.52%

The CNB Bank Board unanimously left interest rates unchanged at 3.5% in the face of uncertainty over the Iranian conflict, although its new forecast suggests an increase to 4% this quarter. The decision is likely to have been driven by a combination of lower economic growth at the start of the year, which may have increased the weight of an alternative scenario with slower growth and lower rates. But probably also the fact that the baseline scenario with higher rates is only assumed for two quarters. It is therefore not surprising that the Board would want to have this monetary policy move sanctified by future developments. However, the latter may surprise with an inflationary development, of which a part of the Board is aware.

Commentary by Miroslav Zámečník, Chief Advisor of the Czech Banking Association

Comment by Jaromír Šindel, Chief Economist of the CBA: Mortgage rates are significantly determined by the movement of market interest rates. However, structural factors in the banking market are also important. The CNB's investigation of credit conditions in our analysis helps to explain what factors influence the difference between mortgage and market interest rates deviating from its normal level. The CBA analysis shows that a combination of stronger demand and competition among banks plays a key role. It is the latter that can lead to more favourable rates for clients without undermining market stability. The difference between mortgage rates and market rates that we have been monitoring is therefore mainly dampened by stronger demand, but in an environment of growing competition, which is key. Banks' profitability also plays a role, acting as a corrective mechanism to maintain competitive interest rate spreads but also market stability.

Comment by Jaromír Šindel, Chief Economist of the CBA: The January slowdown in consumer price growth to 1.6% (mainly due to fiscal intervention in regulated energy prices) was accompanied by a discussion of a possible slight reduction in the CNB interest rate in order to fine-tune the recent interest rate cycle. However, persistently higher momentum in core inflation has left its interest rate unchanged, and risks associated with service prices and fiscal policy leave all options open for the central bank to move its interest rate. This is also true in light of the central bank's new forecast outlook, which admittedly encourages a marginal short-term interest rate cut before rising to 4% as early as the end of this year. With its decision and the reiteration of both inflationary and disinflationary risks, the central bank has tempered the dovish expectations of some market participants and the outlook for a 3.5% rate still seems likely. The key is the reiteration of the thesis of the sustainability of a return to the inflation target through softer core inflation.

Comment by Jaromír Šindel, Chief Economist of the CBA: The analysis summarizes the government's regulatory steps that will further slow consumer price growth this year, probably well below 2%. What does this mean for the CBA, which seems to be starting to deflate the pigeon balloons, at least more than at the end of last year? Given its earlier communications, where inflation is headed in 2027 should be key, which will also indicate the direction of core inflation in the months ahead. And it is not just the case of still strongly rising services prices that are the focus of this analysis, the first part of the triptych ahead of the CNB's February board meeting.

Comment by Jaromír Šindel, Chief Economist of the CBA: The central bank did not surprise by unanimously leaving interest rates unchanged, i.e. with the two-week repo rate at 3.50%, for the fifth meeting in a row after a 25bp cut in May. Although the Board did not change its view of the risks and uncertainties surrounding the CNB's November forecast, it did assess the risks to inflation as balanced, given the risks in financial markets and the removal of the renewable energy levy, following November's upside assessment.

Comment by Jaromír Šindel, Chief Economist of the CBA: The CNB is waiting for a new impulse. The CNB is waiting for the new government to announce its plans, both from the data and from future analysis of the new government's upcoming plans. The CNB's own outlook, with more moderate consumer price growth at the end of the year and a stronger economy in real terms in Q3, opens up the possibility of more hawkish communication in the rest of the year. But I believe the CNB will wait to reassess its communication until the contours of the new government's policy are clearer.

Commentary by Miroslav Zámečník, Chief Advisor of the Czech Banking Association

Comment by Jaromír Šindel, Chief Economist at the CBA: While the CNB unsurprisingly left interest rates unchanged with the two-week repo rate at 3.5%, the Board's statement on the monetary policy settings, however, was more surprising in its less hawkish tone, leaving open all possibilities for future monetary policy settings.

Commentary by Jaromír Šindel, Chief Economist of the CBA: Higher-than-expected wage growth will be the main, but not the only, reason for keeping the interest rate at 3.5% at the CNB's September meeting and for the intensification of the hawkish tone in the communication. The latter may indeed indicate a further upward movement in the interest rate, but rather in an unspecified distant horizon. A stronger koruna or tighter monetary policy through the longer end of the yield curve is unlikely to lead the CNB to a dovish mindset.

Economic commentary by Jaromir Šindel, Chief Economist of the CBA

Commentary by Miroslav Zámečník, Chief Advisor of the Czech Banking Association