Czech National Bank cuts rates to 4.5%

The Czech National Bank (CNB) announced on August 1 that it was cutting its two-week repurchase rate by 25 basis points to 4.5% as inflation remained within its target range.

In June, headline inflation fell to 2% – the central bank’s target with a 1% band. It had previously been 2.6% in May, though it had hit 2% in February and March. “Price stability was thus restored in the Czech Republic,” the CNB said.

The bank last cut rates, by 50bp, on June 27. Since it began its cutting cycle last December, it has reduced the two-week repo rate by 250bp from 7%.

In Q2 2024, the economy grew by 0.3% from the previous quarter and by 0.4% year on year. The CNB said it expected headline inflation to remain at around 2% for much of the rest of the year. It expected the average for the year to be slightly higher, at 2.2%, as a result of base effects, but projected an average of 2% for 2025.

However, the bank expected core inflation to average 2.5% in 2024 and to fall to 2.3% next year. It also predicted that GDP would grow by 1.2% this year and by 2.8% in 2025. It added that tightness in the labour market was easing slowly, but that unemployment remained low.

Despite falling inflation, the bank warned of some upside risks, not least from the services sector and from wage growth. It said that inertia in services inflation, which has been a problem in multiple European countries, could drive up inflation more broadly.

It also pointed to demands for greater wages in the public and private sectors and growth in public spending as potential upside risks. Average wage growth was recorded at 7% in Q1.

The CNB added that weaker economic activity globally, including in neighbouring Germany, posed a downside risk to inflation.