Central Bank cuts rates in June

At its meeting on 27 June, the Board of the Czech National Bank (CNB) lowered the 2-week repo rate by 50 basis points to 4.75%. Moreover, the CNB lowered the discount and Lombard rates by the same amount to 3.75% and 5.75%, respectively. The cut, which followed May’s same-sized reduction, took markets by surprise, as a smaller interest rate cut had been priced in. Moreover, the move was not unanimous: Two of the seven total board members voted for a smaller, 25 basis point reduction.

The key domestic factors driving the Central Bank's decision on interest rates were primarily related to price pressures; while inflation was above the midpoint of the CNB’s 1.0–3.0% tolerance band in May, it remained within range, coming in at 2.6%. The Bank noted that, despite the cut, interest rates remain significantly positive, meaning they will continue to drive inflation towards the 2.0% target.

Looking ahead, the Central Bank stated that rate reductions would slow down once interest rates approached their neutral level. Moreover, it added that upside risks to the inflationary outlook remain—like higher wage demands—and that it would therefore take large interest rate cuts off the table going forward. Moreover, it added that the interest rate reduction process could be paused or terminated at any time if inflation, especially its core component, does not behave as expected. The next meeting is set for 1 August. All our panelists see further cuts this year, although there is a 125 basis points spread between the maximum and minimum projection.

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