The Czech National Bank (CNB) cut its key rate by a higher than expected 50 bps to 6.25% on February 8, as policymakers reacted to macro-economic figures show that growth is still struggling to accelerate, while inflation is falling fast.

The central bank began cutting rates just before Christmas, becoming the last of the independent monetary authorities in Central Europe to begin a monetary easing cycle. The key rate in Poland is 5.75%, while in Hungary it is 10%, compared to 4.5% for the European Central Bank.

Capital Economics predicts an even larger cut in the 2-week repo rate in March and says it could fall to around 3.75% by the end of the year – helping household spending and business investment – though most economists expect it to be at 4% or more. One board member even backed a cut to 6% at this meeting.

The Czech crown – which has been depreciating in recent weeks on expectations of a rate cut – broke through CZK25 to the euro on the news.

Czechia remains the laggard of the EU as the economy has still not recovered to its pre-pandemic level. GDP grew just 0.2% quarter on quarter (q/q) in the fourth quarter and declined 0.2% year-on-year (y/y) and 0.4% over the whole year. In a new forecast, the CNB expects growth this year of just 0.6%, rather than 1.2%.  

Consumption has been depressed by high inflation, with retail sales falling by 4.1% in 2023, the worst annual decline since 2001. However, there were signs of a recovery In December, with consumer confidence up and retail sales increasing by 1.6% year-on-year and by 0.2% month-on-month.

Industry has also been knocked by the slowdown in the German economy. Czech industrial production figures for December showed a decline in output by 0.7% year on year, and an overall fall last year of 0.4%, the worst result since the COVID-19 pandemic-stricken year of 2020. Month-on-month production grew by 2.8%.

Purchasing Manager Index figures for January released last week showed an increase from 41.8 in December but remained well below the 50 mark, indicating overall pessimistic expectations for future growth.

Despite the weak growth, many economists had expected the central bank to be more cautious, given that Czech inflation is currently the highest in the European Union (EU) and is likely to remain above the central bank’s 2% target for most of this year. Inflation in December was 6.9% y/y, and the overall average in 2023 was 10.7%.

January inflation figures are out next week, with a big fall expected because of high base effects from the energy price hike in January last year. The Ministry of Finance forecasts average inflation of 3.1% this year, the CNB 2.6%.

At well as cutting the 2-week repo rate, the CNB also reduced the discount rate in the same range to 5.25% and the Lombard rate to 7.25%.