The CNB left interest rates unchanged, inflation will be very close to the 2% target over the monetary policy horizon

• At its August meeting, the Bank Board left interest rates unchanged. The 2W repo rate remains at 3.5%. The Bank Board assessed the risks and uncertainties of the outlook for the fulfilment of the inflation target as inflationary overall.
• Inflation will stay in the upper half of the tolerance band for the rest of this year. It is expected to fall gradually towards 2%.
• The economy is expected to grow by 2.6% this year and next year. This year, the recovery in economic activity will be driven by domestic demand, in particular households’ consumption expenditure.
• Consistent with the forecast is a modest decline in short-term market interest rates initially, followed by a slight increase in rates next year. A restrictive effect of interest rates and the koruna exchange rate will ensure the fulfilment of the inflation target at the monetary policy horizon, i.e. in the second half of 2026.

As expected, inflation increased towards the upper boundary of the tolerance band in June, due to growth in food prices and also to higher core inflation. The latter increasingly reflects higher prices in housing-related services. Within core inflation, however, goods prices (e.g. prices of household equipment and cars) have now started to accelerate, too. Firms’ margins may rise slightly amid falling energy prices. The still unfinished disinflation process is evidenced by the unfavourable structure of inflation (see Box 2 for more details), and also by the persisting sensitive perception of inflation by households.

The inflation pressures are expected to weaken marginally in the months ahead, but inflation will remain elevated, due, among other factors, to house prices. The housing market situation is discussed in the Appendix. The baseline scenario of the forecast thus does not expect inflation to return very close to the 2% target until the second half of next year. This will be aided by gradually slowing house price growth, along with diminishing tightness in the labour market, reflected in declining growth in wage costs. The forecast expects inflation to rise slightly in 2027 as a result of the one-off primary effect of the introduction of the EU ETS 2 emissions trading system, which is discussed in more detail in Box 1. As the resulting price effect is surrounded by uncertainty, a scenario in which the introduction of the ETS 2 has double the effect on inflation relative to the baseline scenario has also been prepared.

The Czech economy is expected to continue recovering in the quarters ahead. The growth is expected to be due mainly to household consumption, driven by sizeable growth in real wages and a gradual decrease in the saving rate. Investment activity is also expected to grow, driven initially by additions to inventories and later by accelerating fixed investment. The latter will be supported by a recovery abroad and absorption of EU funds. The tariffs imposed on European imports to the USA will dampen growth in external demand this year. In the following years, however, exports will gain momentum, due among other factors to the release of the debt brake in Germany.

The exchange rate was close to CZK 24.6 to the euro in July. So far, the koruna has thus proved highly resilient to the uncertainty connected with the rise in protectionism in global trade. The forecast expects the exchange rate to weaken slightly by the end of the year, owing to muted growth in labour productivity and an expected decline in koruna interest rates. The koruna should strengthen slightly next year due to an improving economic situation.

Consistent with the forecast is a modest decline in short-term market interest rates initially, followed by a slight increase in rates next year. The decision adopted maintains tight monetary conditions with regard to the inflationary balance of risks, returning inflation very close to the target at the monetary policy horizon.

The Bank Board assessed the risks and uncertainties of the outlook for the fulfilment of the inflation target as inflationary overall. As regards domestic inflationary risks, the risk of inertia in services inflation, including imputed rent, and in food inflation persists. A potential acceleration of money creation in the economy stemming from a further stronger recovery in lending activity, especially on the property market, is also an inflationary risk. Potential additional growth in total public sector spending would lead to a risk of fiscal policy having an even greater inflationary effect. Continued rapid wage growth related to persistent tightness in the labour market is an additional inflationary risk. By contrast, inflation could be dampened by a stronger koruna exchange rate. The launch of the EU ETS 2 is a risk to inflation in 2027 and the subsequent years. Increasing barriers to international trade are a downside risk to global economic activity. However, the impact on inflation is not clear cut, especially in the longer term. The risk of markedly weaker German economic output is partly offset by the planned fiscal stimulus of the new German government. The development of the wars in Ukraine and the Middle East represents an uncertainty.

Chart – Inflation will be slightly above the 2% target this year and very close to it over the monetary policy horizon
headline inflation; y-o-y in %; confidence intervals in colours

Table – Growth in domestic economic activity will be around 2.5% this year and next year
y-o-y changes in % (unless otherwise indicated); changes in pp (and in CZK/EUR for exchange rate) compared to previous forecast in brackets