MNI CNB WATCH: Hawkish 25Bps Cut Confirms Expectations

The Czech National Bank delivered a 25-basis-point rate cut to leave the 2W repo rate at 3.5%, the discount rate at 2.5% and the Lombard rate at 4.5% on Wednesday, but continued to stress inflationary pressures, in line with expectations.

The CNB’s new macroeconomic forecasts “assume” a further decline in interest rates in Q2 2025, the Bank said in a statement, “followed by broadly stable interest rates”. (See MNI EM CNB WATCH: Hawkish Cut As CPI Dips, Core Still Sticky)

However, “[t]oday’s step is only very cautious and monetary policy remains and will remain tight – real rates are distinctly positive both ex post and ex ante. Persisting stronger inflation pressures from the domestic economy are limiting room for further rate cuts,” the statement added.

Inflation - at 1.8% in April according to flash estimates - is now averaging 2.5% this year due mainly to elevated services inflation, and 2.2% in 2026, with overall risks to the outlook described as “modestly inflationary.”

Services price growth, food prices, above-average pay rises and large increases in property prices were all identified as upside risks.

While global financial market uncertainty has led to a tightening of financial market conditions, lack of clarity over international trade barriers means their full impact on growth, inflation, fiscal and monetary policy cannot be assessed reliably, the Bank said - although various possible scenarios are under consideration.

As in February, the Czech economy is seen expanding by 2% this year, but the forecast for GDP growth for 2026 was cut from 2.4% to 2.1%. 

The Bank Board again reiterated that money growth must be kept under control if inflation is to remain low. Looking ahead, rates decisions will continue to be taken on the basis of incoming data, including exchange rate developments, the effect of fiscal policy on the economy, labour market dynamics and changes in internal and external demand, it said.