New Czech government & increase of interest rate

New government in the Czech Republic

The parliamentary elections held in October 2021 resulted in a new government in the Czech Republic. Its main objectives include stabilization of public budgets, reduction of the state budget deficit and putting a stop to state indebtedness.

The state debt of the Czech Republic has increased from CZK 1.6 trillion to CZK 2.5 trillion over the past two years. The new government aims to end this. The first step therefore is the revision of the 2022 state budget and the reduction of the deficit proposed by the previous government.

The new government wants to stabilize public budgets using the following means, among others:

• maximizing the use of EU resources,
• adjusting the expenditure rule so that government spending cannot be increased regardless of reserves and the economic situation,
• creating a tax brake rule, i.e. setting a maximum ceiling on the tax burden, above which any further tax increase would be automatically excluded,
• enforcing the implementation of a global agreement on two-pillar taxation at the OECD level, which will ensure that multinational companies pay taxes where they actually do business and generate profits.
   

In its program, the new government also focuses on industry and trade. The main objective of the government is to strengthen the competitiveness of Czech industry, reduce the burden on companies and self-employed persons, support the development of nuclear and renewable energy sources with a view to climate goals and energy security. In accounting, the plan is to introduce the possibility of keeping accounting and tax records in euros and to reduce the burden of bureaucracy.

Interest rate increase due to inflation

The Czech National Bank’s Bank Board has increased the basic interest rate several times in succession. The basic rate is therefore the highest since 2008, currently around 4%. By raising the basic interest rate, the Czech National Bank is trying to dampen down inflation expectations and intends to continue rate increases in 2022. According to expert estimation, the basic interest rate could climb up to 5%.

The basic interest rate increase has resulted in the strengthening of the Czech koruna, but also in more expensive loans, especially mortgage loans for new clients and for clients whose fixed interest rate term is coming to an end. The Czech koruna is now the strongest against the euro and the dollar since February 2020. In 2022, the Czech crown can be expected to strengthen even more significantly to CZK 24 to the euro.

If you wish to discuss these topics, please contact: WTS Alfery s.r.o., Prague

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