Economic impacts

CNB not to cut interest rates before 2025


The Czech National Bank (CNB) will cut interest rates no earlier than in 2025, said Tomas Havranek, an economist at the National Institute SYRI and a member of the government's National Economic Council (NERV), in a commentary.

Members of the CNB's Bank Board know that after a period of double-digit inflation, the public will not blame it if inflation is around zero or slightly negative, according to Havranek. This awareness is so strong and the need to restore the institution's credibility so urgent that a rate cut is out of the question this year and unlikely next year, he said.

The financial market has long expected the CNB to cut interest rates this year, but that will not happen, Havranek said.

"The CNB has de facto tolerated high inflation for the past year on the grounds that further anti-inflation steps are too costly for the economy. However, the bank's only constitutional task is to take care of price stability. In order to show that it really cares about price stability and that it is not deliberately violating the constitution, the bank will, at least throughout next year, balance previous failures and tolerate low inflation, and perhaps even deflation in the short term," he said.

The Bank Board will want to avoid making a mistake at all costs and will rather allow the inflation target to be undershot than overshot, he added.

The expectation of interest rate stability until at least February 2025 is also consistent with the current communication from most of the board members, according to Havranek.

"They emphasise that rates will indeed be stable for a long time and that they will never return to low levels. So it is possible that rates will remain at 7 percent even if inflation falls below zero. This will mean the highest real interest rates (net of inflation) in history," Havranek said.

However, even high real interest rates make a lot of sense from the CNB's point of view, according to Havranek.

"The bank says real rates should be around 1 percent on average. But over the last 20 years, they have rarely gone into positive territory, and on average, they are deeply negative," Havranek said. The CNB will want to compensate savers for their huge losses over the last three years, he added.



Prof. PhDr. Tomáš Havránek Ph.D.

Position: Senior researcher
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