MNI CNB WATCH: Rates Held As Growth, Price Projections Raised

The Czech National Bank left key interest rates unchanged on Thursday, with inflation seen above the 2% target for the remainder of the year and at the top end of the tolerance band over the medium term, amid growing domestic price pressures. (See MNI EM CNB WATCH: Czech Rate Hold Seen As Price Pressures Persist)

Bank Board members voted unanimously to keep the two-week repo rate at 3.5%, the Lombard rate at 4.5% and the discount rate at 2.5%, and stressed the need for tight monetary policy in a statement.

Inflation - at 2.8% in July - is seen falling to 2.7% in August and 2.6% in September, ending the year at 2.1%, to average 2.6% - an uptick of 0.1% on the number seen in the Spring.

The pace of price growth is expected to average 2.3% in 2026 - another increase of 0.1% on May’s projections - rising to 2.5% in 2027.

EU EMISSIONS IMPACT

For the first time, the Bank also identified the launch of the EU Emissions Trading System 2 (ETS 2) as risk to inflation “in 2027 and the subsequent years.”

The outlook for Czech GDP was also revised up: from the 2.0% in 2025 seen in the Spring forecast to 2.6% in the Summer exercise, with output expected to increase by another 2.6% next year (versus the 2.1% seen previously), and 2.9% in 2027.

The CNB assessed overall risks to the outlook as inflationary, and cited such domestic risks as growing household demand, increasing credit growth, inertia in services inflation, imputed rents, persistent food inflation, additional growth in total public sector spending, and continued rapid wage growth due to tight labour markets.

Downside risks to growth and inflation continue to include a stronger koruna exchange rate and a further dampening of global economic activity as a result of increased trade barriers, though the longer-term impact of the latter on inflation is unclear, the CNB said.