The CNB will raise rates again today, they can go up to seven percent

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The Czech National Bank will raise interest rates again on Wednesday. The majority of experts agree on this, and the members of the board also announced it. But the question is how much. There is even a completely realistic scenario in the game that the Bank Board will move rates higher by a record value of 1.25 percentage points. This would bring the base rate to seven percent. Such a step will again make mortgages and other loans more expensive for both citizens and companies.

By raising rates significantly, the CNB Board will try to take action against high inflation, which rose by 16 percent year on year in May, the most since 1993.

It will be the last monetary policy meeting of the Bank Board in the “old” composition. At the beginning of the month, President Miloš Zeman appointed new members of the CNB’s Bank Board. Specifically, Eva Zamrazilová, Karina Kubelková and Jan Frait. They will replace Tomáš Nidetzký and Vojtěch Bend in the council from July. The current governor Jiří Rusnok will then be replaced in May by Aleš Michl.

Another important question is how the new composition of the Bank Board, which will meet in August, will respond to high inflation in the future. It is generally expected to take a more reserved stance on further rate hikes.

The newly appointed CNB Governor Aleš Michl has previously announced that he is opposed to raising rates and will propose that they be kept at the current level at the first August meeting under his chair.

In the current, old, seven-member bank board, he and another member Oldřich Dědek are in the minority in this opinion. However, new members and the promotion of Michel to head the central bank are likely to change the balance of power.

At its last monetary meeting in early May, the CNB Board raised the key interest rate by 0.75 percentage point to 5.75 percent, the highest level in more than 20 years. This was the sixth above-standard increase in the rate by more than 0.25 percentage points in a row. There is also talk that the current council will use its last meeting to raise rates as much as possible in order to eliminate the much more cautious policy of its successors.

Rapid increase

Markets have no doubt that rates will go up again on Wednesday. However, the question is how strict the central bankers are to be. There are two main scenarios in the game. An increase in the key interest rate by one percentage point or by more than one percentage point, which analysts say is more likely.

“I expect a more significant upward shift, but not primarily because the old composition of the Bank Board is meeting, which would perhaps want to set a higher standard, although this cannot be ruled out. However, I see the increase in pro-inflation risks as the main reason given the CNB’s latest forecast, ”comments Jan Bureš, Chief Economist of Patria Finance.

Petr Dufek, the chief economist of Creditas Bank, also agrees. “I don’t know if he will want to tactify the old composition of the bank board, but I can very easily imagine that the new bank board will also be pushed to further increase rates,” says Dufek.

“After all, the koruna does not strengthen and slow down inflation, on the contrary, the CNB must watch the market so that the koruna does not weaken. This is not a constellation for maintaining rates or reducing them. Especially when rates in the world around us are also rising, ”says the economist, who assumes that the CNB Board will raise rates by 1.25 percentage points on Wednesday. According to him, the main reason is high inflation, which is well above the forecast and its outlook is deteriorating further.

According to Bureš from Patria Finance, the main pro-inflationary factors are higher inflation in May by more than a percentage point compared to the latest forecast., the second is a weaker koruna than the last forecast, the third factor is higher inflation in the euro area. “These circumstances are likely to lead to a significant increase in interest rates, and I expect a shift of 1.25 percentage points,” says Bureš.

“The big question is what inflation numbers will come for June and July. It is likely that we will reach a peak of inflation above 17 percent in June and the subsequent slowdown in the second half of the year will be very modest. In a situation where rates abroad will go up more aggressively than we expected, it is quite likely that the changed Bank Board will receive a new August forecast, which will require further rate hikes, “says the economist.

According to him, from the market’s point of view, it will be crucial how the communication between the CNB’s professional apparatus and the new Bank Board will take place. “It is true that the 7% rates are already very high, but I see it as quite probable that the new bank board will push the markets further further,” adds Bureš.

According to Tomáš Volf from Citfin, there are two main scenarios in play. The first is to increase rates by one percentage point. “Markets are calculating that the CNB could raise the rate to 6.75 percent. This would be indicated above all by the fact that under the baton of the new Governor Michel, the hawks will not be on their feet and the tendency and willingness of the Bank Board to continue raising rates will be lower, “he says.

According to him, the second scenario is an increase of more than one percentage point. “The possibility of an even sharper increase in rates of up to seven percent is also quite realistic. At first glance, this limit seems to be outside the framework in which the CNB has been operating for decades, but the situation is far from normal and requires tough measures. Therefore, it is absolutely realistic that rates will rise even above this limit, “says Volf.

“If the CNB went up to 7.25 percent, it would be a clear signal to the markets that the determination to fight inflation is very strong. The last session in the old composition may want to increase the rate ‘forota’. At the same time, this step would free up the hands of new members of the board, who will be able to rely on higher rates and the pressure for further lifting will not be such, “says the analyst.

On the contrary, he sees an increase in rates of less than one percentage point as unrealistic. “If this scenario occurred, it could be read as a certain victory of the new management of the Bank Board and de facto as its first decision (albeit in the old composition). For the markets, this would mean a negative signal that the CNB’s willingness to address inflation with rates has been significantly exhausted, ”adds Volf.

All seven of their members will attend Wednesday’s meeting of the Bank Board. The decision on interest rates itself will fall at 2.30 pm and on the business program Agenda former CNB Governor Miroslav Singer will comment on it.

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