Czech companies started to prefer loans in euros instead of koruna earlier. But since the outbreak of the coronavirus pandemic, their appetite for euro loans has started to increase and has grown dramatically in the last twelve months. The interest rate differential between koruna and euro interest rates is the largest in two decades, to the detriment of the Czech currency.

While the average interest rate on new loans to non-financial corporations was 6.15 per cent in the Czech Republic in March this year (more recent data are not yet available), it was only 1.49 per cent in the euro area. This is based on data from the Czech National Bank and the European Central Bank.

No wonder. The CNB's key interest rate (two-week repo rate) is currently 5.75 per cent, while the ECB's similar rate is at zero. The deposit rate is even half a percentage point below zero. These rates are the basis for both the interbank market rates (PRIBOR and EURIBOR) and the rates of client products, whether savings or credit. There is also an abysmal difference here. The PRIBOR rate ranges from 5 to 5.74 per cent (overnight to annual rate), while EURIBOR oscillates between -0.573 and 0.364 per cent.

As a result of the interest rate gap, the share of euro-denominated loans in the financing of domestic enterprises is at an all-time high. At the end of the first quarter of this year, it reached almost 37 per cent of the total volume of newly negotiated loans.

However, it is likely that the best period for obtaining a euro loan from the perspective of Czech companies is coming to an end. This is for two reasons. The first is the expected renewal of the Czech National Bank's board of directors on 30 June this year and the related slowing or complete halt of further increases in key interest rates. The second is the announced increase in key rates also by the European Central Bank. Its president, Christine Lagarde, confirmed a few days ago that the ECB is ready to take the first step towards higher rates as early as July.

Nevertheless, it can be expected that taking a loan in euros will be more profitable than in crowns for many months to come. The European Central Bank is unlikely to raise rates at such a rapid pace as the Czech National Bank has done over the past year, so the interest rate differential is likely to remain skewed against the koruna for some time.

However, the inflation differential, which will push the nominal exchange rate of the koruna depreciating against the euro, cannot be overlooked, which to some extent increases the exchange rate risk for Czech companies. If the koruna actually weakens, this means an additional cost for the euro loan from the perspective of the koruna resident. At the same time, however, it should be borne in mind that the Czech National Bank is armed with a good amount of foreign exchange reserves, so it is unlikely to let the koruna depreciate above CZK 25 per euro. In fact, the CNB signalled its readiness to intervene in favour of the Czech currency three weeks ago, when the koruna reacted by weakening on the appointment of a new governor of the Czech central bank.

BCM analyst team