The Czech National Bank decided to maintain its key interest rate on Thursday, having reduced it during each of the previous eight policy meetings. This decision comes amidst projections that inflation will stay above the 2% target for the next two years.
As anticipated, the CNB Bank Board kept the two-week repo rate steady at 4.0%. The decision saw support from five rate-setters, while two members advocated for a 0.25 percentage point reduction in key rates.
Since December 2023, the CNB has progressively lowered interest rates, with the two-week repo rate dropping from 7% to 4%. Despite this, the bank has indicated that monetary policy remains restrictive.
Forecasts suggest that inflation will linger marginally above the 2% target from the second quarter of 2025 until the end of 2026, based on the bank's revised projections.
"The disinflation process within the core components of the consumer basket, notably in the services sector, is still ongoing," the CNB remarked. "Consequently, the Bank Board has opted to temporarily halt the process of reducing interest rates."
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In the short term, price growth is expected to increase due to a resurgence in food prices and base effects. Next year, headline inflation is anticipated to sit within the upper half of the tolerance band, facilitated by a marked slowdown in the growth of administered prices.
Liam Peach, an economist with Capital Economics, predicts that the central bank will resume its rate-cutting cycle next year, given the favorable inflation outlook.
"Inflation has remained within the central bank's 1.0-3.0% target range throughout this year, and we anticipate it will continue to do so next year," Peach stated. "We foresee an additional 100 basis points of cuts throughout the year, reducing the policy rate to 3.00% by the end of 2025. This is likely to position Czechia as one of the few emerging markets where policy reaches a neutral stance."
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