Central Bank holds fire in August

Bank stands pat: At its meeting on 7 August, the Czech National Bank (CNB) decided to keep the two-week repo rate unchanged at 3.50%—the lowest level since 2021—for the second consecutive meeting, in line with market expectations. All seven board members voted in favor of the hold.

Rate cut off the cards as CNB faces above-target inflation: The CNB’s decision was motivated by persistent inflationary pressures and its projection that consumer price growth will remain above the midpoint of its 1.0–3.0% inflation target through year-end. The Bank also noted upside inflation risks stemming from continued rapid wage growth, additional public sector spending and faster money supply growth due to a faster pick-up in credit activity, especially in the property sector. On the external front, the impact of mounting trade frictions is still unclear, and geopolitical risks—notably the wars in Ukraine and the Middle East—continue to cloud the outlook.

The interest rate outlook at end-2025 is blurred: The CNB did not provide any explicit forward guidance and stressed that future decisions will be data-driven and contingent on evolving macroeconomic conditions. The vast majority of our panelists expect the Central Bank to hold fire at the next meeting on 24 September. However, looking at the year-end rate, our panel is roughly split between no changes in interest rates and cuts ranging from 25 to 75 basis points. The koruna’s strong performance vs the euro—soaring to its strongest level since December 2023 in July—tilts the balance toward the doves, while the lingering fog of inflation uncertainty gives the hawks their edge. Potential downside risks include a stronger-than-expected koruna and weaker economic growth abroad, especially in Germany, the Czech Republic’s top trading partner. The Bank will reconvene on 24 September.

Panelist insight: Commenting on the outlook, Kevin Daly and Basak Edizgil, analysts at Goldman Sachs, stated: “We believe that the strength of the Czech Koruna, combined with easing external inflationary pressures, will help drive Czech inflation and interest rates lower over time. Paradoxically, the hawkishness of the CNB adds fuel to this argument: the Koruna is already trading nearly 2% stronger than the CNB has assumed in its revised forecasts, and it has gained 5.5% on a trade-weighted basis this year. With this appreciation, we anticipate core inflation will fall more sharply through the rest of the year, and continue to forecast that Czech interest rates will eventually decline.” Emerging Markets Watch analysts, taking a hawkish view, stated: “We see the new forecast as justification for the current monetary policy course, as it reinforces the need for a restrictive monetary policy. Furthermore, it supports the idea of keeping the policy rate at its current level of 3.50% for a longer period of time. Finally, it opens the door for rate hikes in case inflation risks rise. We remind that CNB governor Ales Michl hammered down that the CNB will aim for price stability, and this is not achieved by just sitting idle.”

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