Czechia: CNB turned hawkish

The Czech economy continues to develop favorably. Although GDP growth will slow to just slightly above 2% this year, this is likely to be a temporary development, as we expect growth to accelerate again next year. Household consumption will remain the main driver, supported primarily by favorable developments in the labor market. The unemployment rate is currently broadly stable at just above 3%. A surprise came with the release of wage data for the first quarter, when nominal average wage growth exceeded 8% in Q1. Although wage growth will moderate over the medium term, it will remain elevated overall.

Inflation reached only 2.1% in May. However, it is expected to gradually strengthen in the second half of the year and hover around 3% in the 2026/27 turn. In June, the CNB raised interest rates and will likely consider one further move for the remainder of the year. We see the probability of both options, holding rates stable and one additional hike, as broadly similar, with a slight tilt towards stability. A moderate rate cut could occur next year if expectations of a gradual easing in domestic inflationary pressures materialize. Even then, the monetary policy stance may remain restrictive.

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