ČNB’s shocking rate hike will strengthen CZK, weaken resi market

Robert McLean

#cee, #proptech, #development a #architecture

There was never any doubt that the Czech National Bank was going to raise its base interest rate last Thursday. It’s been paving the way for months now, inching rates up first in 25 bps increments. More recently it shocked some onlookers with a 75 bps jump. But last week’s 125 bps bombshell had the immediate effect of increasing the two-week repo rate from 1.50% to 2.75%. Outgoing Czech prime minister Andrej Babiš slammed the bank for its decision, but that’s to be expected from any business mogul. The CZK is expected to rise in value against both the EUR and USD in the coming weeks and months as a result.

In retrospect, it’s not clear the bank had much of a choice. With the overall inflation rate now around 5%, the gap between interest rates was simply too large to ignore. “Inflation” must be the first word to be used more often than the word “Covid” in the media since the pandemic began. What began as a theoretical concern over rising prices by economists like Mark Robinson (see his interview for ThePrime back in February) grew into a panic over construction materials during the summer.

What we have now, however, is a 5-alarm fire as energy companies announced double-digit price hikes, and the bill is rising on everything from used cars to food.

I turned first to Mark Robinson for his opinion on the bank’s shock move for a reaction. Does the ČNB see dangers that others don’t? Or have people have simply forgotten that 1% interest rates are abnormal and that they can rise? “Frankly, the latter (mostly). Inflation is 5%. Even with this hike, real rates are still -2.25%,” said Robinson. “It is the rates that are abnormal for the inflation situation. This is exactly what happened in Poland Wednesday (6.8% inflation, rates up to 1.25%, so real rates are -5.55%).”

Robinson points out that emerging market central banks do not have the luxury of managing reserve currencies or having dual mandates (the US Treasury monitors both inflation and unemployment). “The ČNB mandate is clear,” says Robinson. “Fight inflation. The “danger” the ČNB sees is a weaker CZK importing more inflation.” He said the bank’s expectation was that the higher rates would attract money into Czech capital markets, thereby strengthening the Czech koruna. “It worked today, as CZK is higher.”

I also asked Vit Soural who runs the residential sector analyst Flat Zone for his reaction. “The rising interest rates will decrease investment power, which will decrease demand on the property market,” says Soural. “This could mean a good thing from the macro-perspective, meaning the gap between supply and demand will decrease in the short term which might slow down rising property prices.”

“On the other hand, investment power will be weakened on the side of the property developers, too, who have to finance their projects somehow. And considering the only way to solve the housing crisis is to build more projects, this doesn’t add up. So, the demand might decrease, but so will the supply in the long-term.”


Also in ThePrime

Pavel Velebil: Today’s shock rate hike could help the market find a new balance

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Mark Robinson: This inflation is no blip


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