The Czech National Bank (CNB) lowered interest rates by 0.25 basis points to 4.25%, which is the lowest level of rates since February 2022. The move was anticipated by the local market and CNB is maintaining the policy of lowering rates it has pursued since December.    

“Inflation has since the beginning of this year moved close around the 2% inflation target,” CNB stated, adding that “price stability remains in the country” and that “the setting of monetary policy remains strict.” The country's inflation growth stayed at 2.2% year on year, following a slight spike in the spring, and slightly above CNB’s prognosis.

CNB’s board “still sees certain pro-inflationary pressures in the economy,” vowing to “maintain strict monetary policy” and “consider carefully further lowering of rates.” It noted wage demands in the private and public sectors among inflationary risks, and lower output of the German economy, affecting the Czech one, as anti-inflation risk.

In an interview for Czech Television, former CNB board member Lubomir Lizal described the 0.25 bp lowering as logical and careful “given that [the recent damaging] floods led the cabinet to proclaim it will increase [the budget] deficit.”

Czech centre-right cabinet of Petr Fiala approved the increase of budget deficit in response to the flooding at its session on September 25, shortly after CNB’s rate cut. The deficit ballooned by CZK30bn (€1.2bn) to CZK285bn and should be ratified by the parliament in a shortened legislative procedure. The cabinet also approved a budget proposal for next year with a deficit of CZK241bn.

Fiala said at a press conference following the cabinet session that the liberal Pirate Party is on the way out of the cabinet after a sharp spat the day before, which Fiala kick-started by dismissing Pirate Party leader Ivan Bartos from the cabinet over what Fiala described as failed digitalisation of building permits. The move came a day after Bartos resigned as Pirate Party leader following a crushing defeat in the regional elections held the previous weekend.

“Ivan Bartos told me that Pirates will leave the cabinet. I am working with this, and I will proceed according to this,” Fiala told media, adding that Bartos’ portfolio of regional development will be temporarily overseen by the Minister of Labour and Social Affairs, Marian Jurecka.

The Czech Minister of Finance told the media he expects the budget legislation to be backed by the majority of 104 deputies in the parliament of 200. That is, the number of legislators Fiala’s coalition can rely on without the Pirate Party, which has only four deputies. The Pirate Party forum is expected to definitely decide on the move by September 30.