The Czech National Bank (CNB) has lowered its main interest rate by 0.25 percentage points to 3.5%, citing an improved external price environment alongside concerns over global economic prospects. The Bank Board’s decision reflects a cautious approach to monetary easing, balancing inflation risks with signs of weaker global growth. According to Jaromír Šindel, Chief Economist at the Czech Banking Association, the decision aligns with market expectations, with forecasts pointing towards a 3% rate by mid-2026. Of 15 analysts surveyed by Reuters, most anticipated the reduction. However, Šindel noted he personally saw stronger grounds for maintaining the rate at 3.75%, given ongoing inflationary pressures. The central bank’s outlook incorporated only minor adjustments to its previous forecasts, likely reflecting uncertainty surrounding global trade tensions. Šindel highlighted that the CNB may present alternative economic scenarios at its upcoming meeting on 12 May, as hinted by Governor Michl. The decision was influenced by two key factors: the perception that the current rate level remains restrictive in real terms, especially in the context of recent and expected inflation trends; and a reduction in the risk of imported inflation, though it remains unclear whether this reflects lower commodity prices or the potential impacts of a US–China trade dispute. The CNB’s latest forecast suggests a faster decline in interest rates compared to its February projection, aiming for a rate of 3.25% by the end of 2025 and 3% in 2026. This trajectory accounts for the negative impact of trade conflicts on the Czech economy. However, Šindel noted that the CNB’s GDP growth outlook may be overly optimistic if trade tensions escalate further, though current economic data remain solid. The central bank revised its 2026 GDP growth projection down by 0.3 percentage points to 2.1%, while leaving this year’s growth estimate unchanged. The adjustment follows a similar downward revision in the eurozone’s growth outlook. The CNB anticipates a temporary economic slowdown in the second half of 2025, with a quarterly contraction of 0.3%, followed by stronger average growth of 0.75% per quarter in 2026. Interest rate forecasts reflect this outlook, with the 3M PRIBOR rate now expected to fall to 2.85% by the fourth quarter of 2025 and to 2.75% by mid-2026, before stabilising slightly below 3% by the end of 2026. The lowered rate trajectory mirrors weaker growth expectations, though April’s lower-than-expected inflation may have also played a role. Šindel cautioned that a stronger economic rebound could tighten the labour market and necessitate keeping interest rates closer to 3%, even as European Central Bank rates remain lower. The CNB projects a koruna exchange rate of 25.3 CZK/EUR in 2026, despite potential upward pressure from a rate differential. The CNB’s measured rate cut reflects its balancing act between supporting growth and controlling inflation, as economic uncertainty continues to shape policy decisions. Source: CNA