The CNB’s measures in response to the Covid-19 pandemic

(author: Jan Syrovátka)

The CNB responded to the expected impacts of the pandemic with a combination of monetary policy and macroprudential measures. They were aimed at softening the impacts of the pandemic on price and financial stability and supporting the Czech economy. The measures adopted are helping to create an environment on the financial market that will enable Czech financial institutions and the entire Czech economy to better deal with the economic situation that has arisen.

In the first step, it was desirable to cut interest rates. The CNB Bank Board therefore lowered the key interest rates by 50 basis points at an extraordinary monetary policy meeting on 16 March. The rates were cut further (by 75 basis points in the case of the 2W rate) at the regular monetary policy meeting on 26 March. The 2W repo rate was lowered by another 75 basis points to 0.25% at the May monetary policy meeting. The Lombard rate was set at 1% and the discount rate at 0.05% (see Chart 1). These changes were immediately reflected in financial market interest rates and some time later also in client interest rates on loans and deposits. Moreover, the overall monetary conditions were eased by a weakening of the exchange rate, which responded to the worsening financial market sentiment and thus worked as a natural stabiliser.

Chart 1 (BOX) The CNB's key interest rates
The 2W rate was lowered by 2 percentage points in three steps in a short period of time
(percentages)

Other measures were aimed at supporting the Czech banking sector’s liquidity. Although no liquidity shortage is observed in the Czech banking sector, the rules for monetary operations have been modified for preventive reasons. Since 18 March 2020, liquidity-providing repo operations have been announced three times a week instead of the previous weekly frequency. Banks’ bids in these repo operations are fully satisfied at a fixed rate corresponding to the 2W repo rate, i.e. with a zero spread. In addition, liquidity-providing operations with three-month maturity were introduced in May. The approved amendment of the Act on the CNB also made it possible to prepare a liquidity-providing instrument for certain non-bank financial institutions (insurance, pension management and management companies). Since 18 May, these institutions have been able to obtain liquidity in the form of short-term credit from the CNB. Such credit will be secured on the part of these financial institutions by the same securities that are used as standard collateral by credit institutions in liquidity-providing repo operations with the CNB, i.e. primarily Czech government bonds. In addition, the range of eligible collateral accepted from credit institutions (banks, foreign bank branches and credit unions) in existing liquidity-providing operations was broadened to include mortgage bonds. The CNB also called on banks, insurance companies and pension management companies to refrain from making dividend payouts or taking any other steps that might jeopardise individual institutions’ resilience until both the acute and longer-term consequences of the pandemic fade away.

Domestic banks’ initial capitalisation is robust thanks to capital buffers and voluntary capital surpluses. The Czech banking sector as a whole can cope with the consequences of even significantly adverse economic developments. However, economic activity is deteriorating considerably due to the coronavirus-related restrictions, which will have an adverse effect on the quality of banks’ loan portfolios. The CNB has therefore gradually lowered the countercyclical capital buffer (CCyB) rate to support banks’ ability to finance the real economy without interruption and cover potential credit risks (these may arise particularly after the loan moratorium ends this autumn; see below). In March, the CNB Bank Board cancelled its previous year’s decision to raise the CCyB rate to 2% and left it at 1.75%. It lowered the rate to 1% with effect from 1 April 2020 and 0.5% with effect from 1 July 2020.

The mortgage lending rules have been relaxed. The CNB no longer feels the need to dampen potential demand as it did during the peak of the overheated property market. It therefore relaxed the limits on the three credit ratios used to assess applications for new mortgage loans in several steps (see Table 1). As from 18 July, only the LTV ratio (the ratio of the loan amount to the value of collateral) of 90%, reflecting the persisting overvaluation of housing prices, remains in place.

Table 1 (BOX)  Recommended mortgage lending ratios
Two mortgage assessment limits were cancelled; only the LTV limit remains in place

Note: The abolition of the DSTI limit on 18 June 2020 entered into force on 8 July 2020.

The CNB in cooperation with the Ministry of Finance initiated a loan moratorium. It allows firms, the self-employed and households to avoid unnecessary or early insolvencies caused by a drop in their incomes due to the coronavirus pandemic. Such insolvencies would cause irreparable damage to the Czech economy and, in turn, negatively affect the condition of banks and other financial institutions. Under a law passed in April 2020, borrowers suffering a negative economic impact from the Covid‑19 pandemic may stop repaying for three or six months. The moratorium not only allows instalments to be postponed quickly and simply, but also makes it unnecessary for banks and credit unions to increase their provisions due to such postponement. It thus strikes a balance between the needs of consumers and firms on the one hand and banks and non-bank lenders on the other, as both sides are important for maintaining financial stability.