Czech Republic: Central Bank holds fire in December
A pause to the easing cycle: At its meeting on 19 December, the Czech National Bank (CNB) kept the 2-week repo rate unchanged at 4.00%. The halt, which aligned with market expectations, followed a year-long easing cycle that slashed interest rates by 300 basis points. The decision was not unanimous, however, with two of the seven board members voting for an additional 25 basis point cut.
CNB expects inflation to overshoot target: The key domestic factors influencing the Central Bank’s decision included inflation, which is expected to be slightly above the 2.0% target from Q2 2025 until the end of 2026, amid sticky services inflation. While the CNB expects inflation to return within its 1.0–3.0% tolerance band in early 2025, it assessed inflationary risks to the outlook to be slightly tilted to the upside. As a result, monetary policy remains tight; real interest rates are positive and dampening lending activity.
Rate cuts could resume in Q1: The CNB provided no explicit forward guidance on future interest rate movements but indicated that its future decisions will be data-driven. The majority of our panelists expect the Central Bank to resume its easing cycle by the end of Q1 2025, with a 25 basis point reduction.
The Bank will reconvene on 6 February.
Panelist insight: Commenting on the reading, ING’s David Havrlant and Frantisek Taborsky stated:
“Today’s meeting showed that the Board is still in a cutting mood and February should be a lively meeting. January inflation sets the level for the full year given the high seasonality in the Czech Republic, and 2.7-2.8% could be enough for a rate cut. We see the CNB as more dovish on this than our economists and market pricing.”