CNB: Cautious wait-and-see approach and optimistic forecast

At its August meeting, the Bank Board decided to leave interest rates unchanged. The main repo rate remains at 3.5%. The decision reflects an optimistic GDP forecast and continued elevated inflation in services.

After rapid interest rate cuts last year and in the first half of this year, the end of the monetary policy easing cycle is approaching. This is supported by the expected favorable development of the Czech economy. According to the CNB's new macroeconomic forecast, GDP should increase by 2.6% this year and next year, and by as much as 2.9% in 2027. Given the newly imposed tariffs on imports of goods from the EU to the US, this is a relatively optimistic estimate, but not entirely unrealistic.

According to the CNB's new economic forecast, inflation should average 2.6% this year and 2.3% next year. It should not exceed the inflation target tolerance band (1-3%) even in 2027. The CNB's bank council is more concerned about inflation in certain parts of the economy. Specifically, in the domestic services segment, where it is still around 5%.

In addition to domestic factors, the external environment also plays an important role. The European Central Bank has already announced a more cautious approach to lowering rates, which may dampen excessive optimism about export demand. On the other hand, the weakening euro and lower energy prices may slightly boost the competitiveness of Czech manufacturers. At the same time, the CNB is monitoring the koruna exchange rate, which remains relatively stable for now. According to the CNB's current forecast, the CZK/EUR exchange rate should average 24.9 this year and next, and 24.8 in 2027.

The coming months will therefore be marked by a balancing act between efforts to support domestic demand and the need to keep inflation expectations under control. Wage dynamics, which remain moderate for now, will also be key. The outlook for GDP and inflation leaves room for a final interest rate cut of 25 or 50 basis points in the second half of this year. The most likely scenario is an end to the monetary policy easing cycle with a repo rate of 3.25%.