The disconnect between the Czech National Bank’s policy rates and actual mortgage rates continues to shape the residential market. While the CNB has cut its base rate by three percentage points, but mortgage rates are stuck, dropping just 0.8 percentage points, with most lenders still setting rates around 4.9%.
And why should they cut rates quicker? October’s lending data suggests Czechs home buyers are quite tolerant about the high cost of borrowing. Banks handed out CZK 26.4 billion in mortgage loans, a 9% jump m-o-m, and 64% higher than a year ago. A key question I’d like to see answered is how many people are borrowing in order to find a place to live, and how many are investing.
But banks don’t just look at consumer demand when setting mortgages. At the moment, persistent inflation pressure and a 2-year low for CZK/USD are playing their part. Global uncertainties are also forcing a reassessment of risk premiums. For example, take the incoming U.S. president whose bright idea for fighting inflation is to impose tarrifs on all of the country’s trading partners. That’s like telling your kids to use lighter fluid to put out a fire.
Maybe deporting millions of workers and replacing them with expensive home-grown talent will magically bring down prices. We’ll have to wait and see on that one. It all matters to Europe, because inflation expectations drive up long-term interest rates everywhere…including here.
On the risk management front, Czech banks are preparing for a moderate increase in default rates from the current 1.4% to an expected 2-2.5%. Again, this remains within manageable levels, but it represents another factor in the pricing equation.
This trend of banks maintaining their margins rather than competing for market share on price isn’t absolute. The truth is, Česká spořitelna made a competitive-looking move this month by cutting 0.2% off of its mortgage rate.
But overall, the traditional relationship between central bank rates and mortgage pricing seems to be evolving. Long-term market rates, which more directly influence mortgage pricing, are responding to a broader set of factors than just CNB policy. Global factors and risk assessment may play a more prominent role in rate setting than domestic monetary policy. That would make it considerably more difficult to do rate forecasting and product structuring.
