The Czech National Bank has cut its main interest rate by 0.25 basis points to 4%, maintaining the policy of lowering the interest rates begun last December. Rates fell from 7% since then.

“Monetary policy nonetheless remains tight,” CNB wrote in a statement, adding that “real interest rates are positive and are dampening lending activity, and hence the creation of money in the economy, and, in turn, long-term inflation.”

Five of the seven board members backed the decision, while one member voted to leave the rates unchanged and one voted for lowering by 0.50bp.

The CNB also worsened the macroeconomic prognosis. It now forecasts gross domestic product growth of 1% this year and 2.4% next year, down on the previous forecast of 1.2% and 2.8% growth, respectively. It projects higher inflation growth as well – 2.5% this year and 2.6% next year, up from a previously projected 2.2% and 2%.     

“The economy is revitalising slowly, it is performing below its potential,” commented CNB’s governor Aleš Michl, who also pointed out that inflation remains slightly above the CNB’s 2% target level, “confirming that the CNB is correct in its careful approach to lowering of the interest rate”.

Czech inflation stayed at 2.6% in September. 

The CNB also expects the koruna (CZK) to weaken next year and in 2026 to average CZK25.40 per €1. It kept the average currency forecast for this year at CZK25.10 per €1.    

The revised CNB prognosis also worsened the estimate of this year's state budget deficit from 2.1% to 2.7% of GDP. This is slightly better than the recent refined estimate of the budget deficit by the Ministry of Finance (2.8% of GDP), which stated that the impact of the September flooding led to the worsening. CNB expects the deficit to be 2.3% of GDP next year and 2.2% in 2026.   

The overall debt of the government sector should be 43.5% of GDP this year, slightly up from the previous prognosis of 43.2%, and it should grow to 44.7% by 2026.

Nominal wage growth should slow down to 6.4% (from 8% in 2023), and real wages should maintain growth at 3.8% this year, 3% next year, and 2.8% in 2026. Real wages were falling in the previous two years. Unemployment is expected at 3.8% this year (up from 3.6% last year) and at 4% in the next two years.