The Czech National Bank (CNB) lowered interest rates by 0.25 basis points to 3.75%, returning to its policy of cutting rates after it kept these intact in December.

CNB also projects the Czech economy to grow by 2% in its new macroeconomic prognosis, down from the 2.8% projected in November, and expects to cut rates further before these stabilise in mid-year.

“Economy is gradually reviving, but it is still moving below its potential,” CNB Governor Aleš Michl told media. He expects household consumption, supported by real wage growth and easing monetary policy, to drive the economy as foreign demand remains subdued.

The rates are now at their lowest level since January 2022. After Michl took over in mid-2022, the CNB kept interest rates high at 7% before it began the easing cycle in December 2023.

Michl also said that “it is possible monetary policy will stay more restrictive longer than the basic scenario in the prognosis expects,” while the CNB board will approach any further monetary policy easing with “great caution.”

CNB also projects that economic growth will accelerate to 2.4% in 2026.

Michl reiterated that under his watch, the CNB won’t return to the pre-pandemic policy of keeping rates below the inflation level.

CNB had its monetary board meeting shortly after the Czech Statistical Office (CZSO) published a flash estimate of January inflation of 2.8% year on year and 1.3% month on month. Earlier, CZSO also published an estimate of GDP growth of 1.6% y/y and 0.5% quarter on quarter in 4Q.  

The lowering of interest rates was widely anticipated in the market. Analyst at Cyrrus consultancy Vít Hradil pointed out for Czech Television (CT) “practically zero response” of the domestic koruna (CZK) currency, while others do not expect the decision to have affect the mortgage market.  

Michl also pointed out that the CNB board did not discuss his Bitcoin plans, saying that the bank board wants to “wait for the analysis results and then decide.”

Last week, Michl suggested Bitcoin could account for up to 5% of the overall CNB reserves of €140bn and an assessment from the CNB team over his cryptocurrency plans, which were met with a wave of criticism from the Czech government and the EU.