MNI CNB WATCH: Rates Cut, But Outlook Shows Inflation Pick-Up

MNI (LONDON) - The Czech National Bank lowered key interest rates by 25 basis points to leave the two-week repo rate at 4.00% on Thursday, with inflation expected to rise into 2025 before gradually falling back towards 2% over the medium-term. (See MNI EM CNBWATCH: 25bp Cut To 4.00% Seen, Fresh Projections Due)

Average annual inflation will be 2.5% in 2024 according to the Autumn forecast, compared with the 2.3% seen in the Spring exercise. After peaking at 3.3% in December 2024, the forecast for next year was increased from 2.0% to 2.6%. with 2026 inflation at 2.2%.

Headline inflation will be close to the upper boundary of the tolerance band around the target at the turn of the year, then decline gradually towards the 2% target, the Bank said in a statement, adding "This confirms that the cautious approach to lowering rates taken so far is right."

Five Bank Board members voted to continue easing, one for a pause in the cycle, and one for reducing rates by half a percentage point.

Should euro area demand, particularly from Germany, retreat further, Czech price pressures will subside more quickly, although in a second scenario, that assumes higher retailers’ margins than the baseline, inflation would prove more persistent, the Bank said.

In Q2 2024 average wage growth slowed compared with the previous quarter to 6.5%, but it remains elevated, with labour markets loosening only slowly, the Bank said. Real household income is supportive of domestic demand.

But the Czech economy’s slow recovery will be moderated by elevated household savings rates and subdued foreign demand for Czech goods and services, the CNB said, with GDP seen growing by 1% this year and 2.4% in 2025.