The CNB did not surprise with its decision to keep the 3.5% rate, nor with its hawkish commentary

- The Board has deliberately maintained hawkish communication, partly influenced by the solid outlook for the economy. It does not foresee a slowdown in the quarter-on-quarter growth rate (despite weaker GDP in Q2 and higher US tariffs), while leading to expectations that consumer inflation will remain in the upper half of the tolerance band in 2027.

- On the other hand, the CNB's forecast allows for a further decline in the base rate to 3.25% (from the current 3.5%) for one year. However, the central bank will only take this step, if at all, when core inflation dynamics approaches the target value - ideally in the form of month-on-month growth of around 0.2%, ideally lower than closer to 0.3%.

- July's core inflation data may give a hint, but the CNB will want confirmation in the months ahead, probably supported by less inflationary/more productivity-related economic growth without additional consumer fiscal expansion (see the upcoming elections).

- I see the substance of the Governor's remarks regarding the need for "moderate credit growth" in a similar vein.

- The crux of the problem is illustrated by the CNB's own forecast, which projects annual GDP growth to accelerate to nearly 3% in 2027, which it says would require an interest rate at a slightly higher 3.6%.

- Keeping the CNB's interest rate above its forecast could support disinflationary behaviour of the koruna, i.e. create a slight disinflationary risk to the CNB's forecast.

- The central bank has now stopped publishing its monetary policy outlook for consumer inflation. We will see tomorrow whether this is an effort to "market" clearer communication to the public or a change in monetary policy strategy, for example in view of the unclear impact of ETS2 on consumer prices in 2027.

The CNB left its interest rates unchanged, i.e. with the two-week repo rate at 3.5%, for the second meeting in a row after the last cut of a quarter percentage point in May. Unsurprisingly, the increased momentum in core inflation, which in the context of economic developments, according to the Board, does not allow for further interest rate cuts, is behind this decision.

Governor Michl explicitly infused his communication with a hawkish tone (unsurprisingly - see outlook here), saying that all three options for a future interest rate decision are in play, without assigning a probability level to each option. Still, the hawkish tone was a bit stronger given weaker Q2 GDP, higher US tariffs, a stronger crown and the possibility of softer July core inflation. On the other hand, none of these factors change the primary cause of higher inflation, namely the inflationary breathlessness of the Czech economy's performance due to low productivity.

From this perspective, I also interpret the Governor's remark regarding the need for moderate credit dynamics, i.e. for the growth of the money supply not to accelerate excessively (in simple terms, through loans and government debt). I believe he was referring to moderate monetary expansion in terms of inflationary effects. That is, relatively less mortgage lending compared to lending for corporate investment activity or less growth in fiscal debt for consumption compared to public investment.

In my view, tomorrow's core inflation data - and especially the evolution of this indicator in the coming months - will be key to whether the CNB maintains rate stability until the end of the year or commits to moving rates in the fourth quarter. However, the outcome of the October elections to the Chamber of Deputies (3-4 October 2025) will also come into play during this period.