Deflation in Czech Republic Leads to Expectations of Lower Interest Rates

“The drop in year-on-year inflation was such that not only inflation itself but also prices fell. So we have deflation for September. All of this was stronger than expected,” emphasizes Datarun economist Petr Bartoň.

“When even the rise in fuel prices could not prevent deflation, it is certainly a strong signal for the central bank that inflation is now much more under control,” emphasizes Bartoň. Getting inflation close to the central bank’s two percent target will also mean lower interest rates. At least that’s what the market thinks.

“Indicators of the development of interest rates fell quite dramatically during the week, which indicates that the market expects a potentially faster reduction in interest rates,” says XTB analyst Štěpán Hájek. Significantly lower rates are to be seen in the medium and long term, which is key above all for the development of housing loan rates.

At the same time, bets on a faster decline in Czech interest rates were already enough to have a real effect on the market. For example, at the end of the week, Fio banka relatively significantly reduced the lower limit of its mortgage rates from 5.28 to 5.08 percent. The September drop in rates across the market was then confirmed by the Hypomonitor of the Czech Banking Association. He pointed to a post-holiday drop in the average rate to 5.7 percent. Thus, mortgages were the cheapest in September over the past year.

More favorable rates are made possible by the dramatic drop in interbank rates, which is a benchmark for banks for the cost of financing mortgage loans. While at the beginning of October banks were raising money to finance a five-year mortgage at an annual interest rate of 4.9 percent, it is currently half a percentage point less.

“Currently, the market is counting on three drops in interest rates by the end of the year, a total of three quarters of a percentage point by the end of the year,” says Komerční banka economist Jaromír Gec, adding that the data on September inflation below seven percent increased bets on a stronger drop in rates. i.e. even below the forecast of the Czech National Bank.

The first drop in interest rates after seventeen months could already occur at the beginning of November, i.e. at the earliest possible date of the regular meeting of the CNB Banking Board on the level of interest rates. “The market’s expectations about the level of rates in the one-year horizon have also fallen. However, indicators of long-term rates fell much more strongly, which indicates a possible decrease in mortgage rates in the medium term,” adds Hájek.

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2023-10-15 03:00:00
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