ČNB changes interest rates

The first increase since 2008 is meant to cool the economy

Interest rates are going to increase in the Czech Republic for the first time since 2008, the Czech National Bank (ČNB) announced.

“The ČNB Bank Board decided at its meeting today to increase the two-week repo rate by 20 basis points to 0.25%. At the same time, it decided to increase the Lombard rate by 25 basis points to 0.50% and to keep the discount rate unchanged at 0.05%. The new interest rate levels come into effect on 4 August 2017,” the bank said in a statement.

“This is the first change in interest rates since November 2012, when the repo rate was cut to technical zero. Additionally, the decision taken today is the first increase in domestic interest rates since February 2008,” the ČNB added.

Czech National Bank Governor Jiří Rusnok said that the rate might not increase if the bank were to strictly follow the target of keeping inflation at 2 percent. “We looked at the economy as a whole, and we saw a series of signals that the economy is very hot, and some cooling won't hurt it. But I would not associate it with catastrophic scenarios. The year 2017 is not 2007 or 2008. On the contrary, we think the position is manageable. We predict that this year the economy will grow by 3.6 percent and slightly over 3 percent in the next two years,” Rusnok said at a press conference.

He declined to say when the next increase would be, and said that the topic had not been discussed at the board meeting. “I could not make any conclusions now. It will of course depend on the development of the crown's exchange rate. Further increases may come over the next two years, but these will be conditioned by the further development of key indicators, not just inflation,” he said.

The announcement caused the Czech crown to strengthen. It went to below Kč 26 to the euto for the first time since November 2013, when the central bank began to intervene in the exchange rate. The crown also strengthened against the British pound, reaching less that Kč 29 per pound for the first time since November 2011.

Analysts said that rising real estate prices were one reason behind the move to change the interest rates, and that the ČNB was trying to head off a potential real estate bubble. Another reason cited by analysts had to do with the coming expiration of short-term bonds, which could lead to a weakening of the Czech crown.

Most analysts agreed that the impact of the change in rates would be modest.

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