The likely further decline in interest rates outlined above and the deterioration in the outlook for the global economy, which resulted in a more favourable external price environment, prompted the majority of the CNB's board to cut the interest rate further, albeit cautiously, by 0.25% point to 3.5%. Conversely, persistently stronger price growth in services, solid economic growth coupled with above-average wage growth again left the communication in a hawkish tone and led one board member to vote in favour of leaving the interest rate unchanged.
The decision was in line with the market's bias (further towards 3% in the first half of 2026) and most analysts (13 of 15 polled by Reuters), while admittedly I saw more reason to leave the rate unchanged at 3.75%.
Rather cosmetic changes were made to the forecast and key assumptions, likely reflecting the uncertainty associated with the outcome of the tariff wars. It will be interesting to see whether the CNB also presents the alternative scenarios mentioned by Governor Michl on Monday 12 May.
The CNB decided to cut the interest rate in May taking into account two factors:
1. The CNB also perceives the new level of interest rate setting at a still restrictive real level (This is true in light of past and expected consumer inflation growth. Of course, this is less true with respect to expected real wage growth or current house price growth, but these are only alternative views, but linked to current inflationary pressures).
2. there has been a reduction in the risk of imported inflation (Here it is not clear to me whether this reflects lower commodity prices or the risk of lower imported prices due to the US-China trade war, and at the same time this factor was not among the risks to the CNB's inflation outlook in Q1).
The central bank's interest rate outlook envisages a steeper decline in the CNB interest rate compared to the CBA's February forecast to 3.25% at the end of this year and further to 3% in 2026, which is in line with the negative impact of tariff wars on the Czech economy. The CNB's forecast can probably be considered optimistic with respect to the GDP outlook, especially if the tariff wars return to the level of early April, but this may be corrected by the still solid figures on current economic developments. On the other hand, the forecast may face an inflation risk if the tariff wars are further subdued due to stronger economic growth, precisely in view of the still solid economic development numbers.