Interest rates for mortgages rise after controversial National Bank move

The Czech National Bank took economists by surprise last week when it announced a 0.75 percent hike in the base interest rate. The move was condemned by the government, but the bank said it was necessary to contain rising inflation rates. The interest rate increase was the biggest imposed by the bank since 1997.

Independent banks responded to the move by saying they would not immediately increase the cost of loans or interest rates on deposits, but ČSOB and Česká spořitelna have now announced an increase in interest rates on mortgage loans.

ČSOB’s interest rates for mortgages with three-, five- and seven-year fixation periods will rise by 0.3 percent as of October 11. As such, the new interest rate for the most common mortgage type with a five-year fixation will be 2.99 percent. Interest rates will rise even more with Česká spořitelna, by an average of 0.4 percent as of October 7. The interest rate for mortgages with fixations of five and eight years will consequently start at 3.14 percent.

It is thought other banks are likely to follow suit. Moneta Money Bank expects to adjust interest rates for mortgages this week. Raiffeisenbank is considering raising rates, while KB and UniCredit Bank have not ruled out an increase either. Representatives of banks said the Central Bank’s increase spells the end of unusually low mortgage rates in the Czech Republic.

“Two years of record low mortgage rates are over, and now we need to adjust to market developments. In response to the Central Bank’s decision, we have decided to move to higher rates. Despite the gradual rise, mortgages remain an attractive product for clients. As such, we do not expect the demand for housing loans to fall sharply,” said Jan Sadil, a member of ČSOB’s Board of Directors.

The Central Bank raised the base rate to combat inflation, which was as high as four percent in August. The government condemned the move, noting that while other developed countries are encouraging growth and higher living standards, the cost of living and doing business in the Czech Republic is set to increase.

Something of a war of words has ensued. With less than a week to go until national elections, the governor of the National Bank criticized Finance Minister Alena Schillerová’s comments and described her as “incompetent.”

Česká spořitelna said it expects interest rates to keep rising, with the base rate possibly reaching two percent by the end of the year and rising to 2.5 percent next year. The bank recommends choosing mortgages with long-term fixations, providing more stable repayment amounts and fixed rates for the entire period of the mortgage loan repayment.

The Czech National Bank’s major base rate hike may have taken economists by surprise, but banks’ consequent increases to mortgage interest rates were sadly predictable. As inflation poses increasing problems for the Czech economy in the post-pandemic world, the era of extremely low interest rates for mortgages finally may be over.