Central Bank cuts rates in May

Bank resumes easing: At its meeting on 7 May, the Czech National Bank (CNB) decided to lower the two-week repo rate by 25 basis points to 3.50%, in line with market expectations. As a result, the Czech National Bank resumed its monetary easing cycle after a brief pause, delivering a cumulative 350 basis points in rate cuts since December 2023. Six board members voted in favor of the cut and one supported a hold.

Lower inflation drives decision: The move was primarily influenced by inflation, which has remained within the 1.0–3.0% tolerance band since January 2024. Moreover, lower-than-expected price growth in April—amid eased imported inflation—likely influenced the decision. That said, elevated services inflation, above-average wage growth, significant property price increases and heightened trade uncertainty pose risks to long-term price stability, likely dissuading a larger rate reduction.

Easing cycle to continue, but cautiously: The Central Bank forecasts a cut in interest rates in Q2 2025, followed by largely steady rates thereafter given lingering upside risks to inflation. Our panelists expect up to 50 basis points of additional rate cuts in 2025. That said, stickier-than-expected services inflation and additional growth in total public sector spending could push our panelists to revise their forecasts for interest rates upward. The Bank will reconvene on 25 June.

Panelist insight: Commenting on the outlook, Jiri Polansky, analyst at Erste Bank, stated: “From a medium-term perspective, today's rate cut likely won't change much. In our current forecast prepared in early April, we slightly leaned towards rate stability, anticipating a cut in August. With today's rate reduction, we'll likely adjust our forecast towards stable rates for the August meeting. [...] However, uncertainty surrounding US tariffs remains high, allowing for scenarios of faster or slower rate cuts depending on specific macro developments.”

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