Czech interest rates won't drop sharply: What this means for the economy

Czechia will not return to the near-zero interest rates that were in place before the Covid-19 pandemic, as they contributed to the extremely high inflation seen in 2022 and 2023, according to Aleš Michl, governor of the Czech National Bank (ČNB). Further cuts to the interest rates are also on hold, which will affect house prices and property demand nationwide.

"Ten years before the pandemic, we had rates around zero, which was a mistake," Michl said during an interview on media outlet CNN Prima News on Sunday.

Michl’s comments mark a shift in tone from the central bank’s recent approach of gradually lowering rates. Since June 2022, the ČNB raised the basic repo rate to a peak of 7 percent to combat soaring inflation. By December 2023, the rate had been reduced to 6.75 percent, and today it stands at 4 percent.

"We are in a waiting period now; a pause," Michl said, emphasizing the need for thorough analysis before determining future rate adjustments. "We will not allow any increase in inflation."

Michl predicted 2025 would bring financial stability and low inflation, estimating inflation at 2.5 percent and economic growth at approximately 2 percent. "Growth will primarily come from household consumption and government borrowing. However, I would prefer it to be driven by investment," he said.

Analysts from Komerční banka project that domestic inflation will average 1.8 percent this year, dipping below the ČNB’s 2 percent target.

Michl identified the country’s high budget deficit and excessive money supply, including household debt, as the primary risks to inflation. He stressed the need for fiscal reforms to reduce the deficit, urging the government to make structural changes.

"The Czech state is 100 percent overstretched. Many people should be laid off, and numerous state agendas should be revised," Michl said, pointing to recent cost-cutting measures within the central bank, such as reducing directors and streamlining operations, as an example.

Interest rates in the Czech Republic affect savings, loans, and mortgages, making the ČNB’s stance critical for households and businesses alike. Michl’s remarks suggest the central bank will prioritize inflation control and fiscal responsibility over rapid economic growth.

Could a lack of short-term interest-rate cuts affect mortgages and house prices in the future? Possibly. When interest rates are low, borrowing costs decrease, allowing buyers to afford higher-priced homes with the same monthly payment. However, this inevitably drives up demand, which can push up prices.