Czechia outlook: Favorable economic development to continue

Favorable economic development is expected to continue over the next two years, remaining relatively stable with strong household consumption as the main source of GDP growth. The foreign trade and private investments which were hindered by weak macroeconomic conditions in Germany, global economic uncertainty, and US tariffs are going to slightly improve next year. Labor market developments will remain favorable, both in terms of the unemployment rate, which will increase only slightly compared to the end of 2025, moving from below towards non-inflationary equilibrium, and in terms of wage growth, which will remain high.

Inflation is expected to remain slightly above the target but within the tolerance band. Current strong domestic inflationary pressures should gradually weaken due to the slightly restrictive monetary conditions. Conversely, the anticipated intensification of fiscal expansion will exert upward pressure, although its extent is currently unknown. Due to these factors, the CNB has recently adopted a more hawkish stance and will remain in a wait-and-see mode. In our view, the most likely scenario now is medium-term rate stability of the key rate, with a reduction expected during the second half of 2027 as inflation pressures decrease. Risks are elevated and two-sided. For example, a rate cut next year cannot be ruled out, especially if a risk in the global economy materializes. The koruna should continue to strengthen gradually, although at a slower pace than this year, supported by CNB rate settings and economic developments.

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