Inflation in August accelerated slightly to 1.9% year-over-year, but a more significant problem remains beneath the surface: core inflation remains at 3%, and service prices have accelerated again on a month-over-month basis. Labor market data point to a mild pro-inflationary risk rather than a disinflationary one. The CNB may leave interest rates unchanged at 3.75% in September and wait impatiently for the November forecast.

July’s industrial and foreign trade figures pointed to a weaker start to the third quarter. The overall economic picture, however, remains mixed: weaker industrial output and exports contrast with more resilient construction, retail, and services. The data thus pose a certain risk to the expected modest recovery of the Czech economy in the third quarter, projected at 0.6% quarter-over-quarter. Moreover, the weakness in July’s industrial output was not across the board, and a solid trend in production outside the automotive sector and energy-intensive industries remains evident, as confirmed by export figures. Foreign trade remains under pressure from higher energy prices. Trends in residential construction remain favorable for both housing starts and completions, despite renewed weakness in building permits.

Consumer prices rose by 0.3% month-over-month in August, and year-over-year inflation accelerated to 1.9%. The higher rate of growth was driven mainly by fuel prices, while food prices had the opposite effect. According to preliminary estimates, core price pressures eased slightly. At the same time, July retail sales (excluding autos) returned to stronger figures, reflecting a sustained strong trend in retail and services. Inflation, adjusted for wage growth, brings some relief to the central bank, but momentum in retail sales and wages will likely keep the CNB in hawkish mode.

Wage growth accelerated to 6.4% year-over-year in the second quarter; however, following a significant revision of first-quarter data, the pace is much more moderate than the original figures suggested or the central bank had expected. Real wages, however, continue to grow briskly, and the persistently strong quarter-over-quarter growth in nominal wages—at 1.6%—maintains the risk of inflation. For the CNB, the wage data thus represent a less hawkish signal than before, but not a reason to change the current monetary policy stance, even in light of the planned stronger wage growth in the public sector.

Overall, strong economic performance of around 2% in the first six months of this year, the surprising resilience of the Czech manufacturing sector, and solid consumer demand are also reflected in lending activity. Everything is growing—from consumer loans to mortgages to loans to businesses. Meanwhile, in July, the share of non-performing loans remained at multi-year lows, and in the case of non-financial corporations, the record improved even further. The Czech banking system has thus found itself in the holy grail of banking: it is meeting dynamic demand for loans that remain very healthy. This holds true on an international scale as well, according to the EBA Risk Dashboard, which shows that as of the end of March of this year (the EBA has not yet published data for the second quarter), the Czech Republic ranked in the top third of the pan-European rankings in terms of loan portfolio quality.

Czech gross national income has improved in recent years, although probably less markedly than suggested by the aggregate data from the Czech Statistical Office. These show that the gap relative to GDP narrowed by 4.2 percentage points, with GNI reaching 97.4% of GDP in 2025, compared with an average of 93.2% in 2006–2015. However, once the specific role of reinvested earnings is taken into account, or when balance-of-payments data from the Czech National Bank are used, the improvement comes to only around 1 to 2.5 percentage points. At the same time, the FDI story is entering a new phase: dividend outflows have moderated in recent years, while reinvested earnings on foreign capital remain high. The role of Czech capital abroad, and the income it generates, is also increasing. This adds a new dimension to the debate about dividend outflows, which by its very nature cannot be separated from the export performance of the Czech economy.

The Czech economy accelerated to 0.4% quarter-over-quarter in the second quarter, but its recovery remains less convincing than monthly data had suggested. It therefore poses only a marginal risk to our outlook for a moderate economic recovery, with GDP growth projected at 2.3% year-on-year in 2027 after 2.0% in 2026 (1.9% in the second quarter). Household consumption is lagging behind real wage growth, and business investment in production capacity is weakening. Construction investment and exports, on the other hand, remain a source of support. Furthermore, weak productivity, combined with rapid wage growth, is keeping inflationary pressures high. Labor productivity thus remains a significant weakness of the Czech economy—both for growth and for inflation.

According to Flat Zone statistics, the price of apartments sold in the Czech Republic approached 100,000 crowns per square meter in the second quarter, while in Prague it exceeded 165,000. However, price growth remains stronger than the aggregate figures suggest, as these are dampened by a shift in transactions toward less expensive apartments and regions. Combined with more moderate growth in asking prices and higher market interest rates, this may contribute to a slowdown in the growth rate of actual prices over the course of a year. However, a more significant decline in price momentum will continue to be held back by supply-side constraints and stronger mortgage frontloading.

Economic sentiment in August deteriorated slightly and fell just below this year’s average. However, it still points more toward a gradual recovery of the Czech economy than a significant slowdown. Consumer and business confidence, in particular, took a turn for the worse, with expectations for future economic developments deteriorating. By contrast, industrial confidence improved slightly, and employment expectations have been rising for the second month in a row. From the CNB’s perspective, the combination of improved labor market expectations and heightened price expectations—particularly in the services sector—remains significant and will continue to warrant a hawkish stance.

The Czech Banking Association’s forecasting panel expects the Czech economy to grow by 2% this year. Growth is projected to accelerate to 2.3% in 2027. These expectations are in line with the May forecast, but the structure has changed: the outlook for household consumption, investment, and exports is more favorable, supported by stronger wages, lending activity, and more resilient foreign demand.

The Czech economy will grow by 2% this year and accelerate to 2.3% next year. This is the forecast in the latest outlook from the Czech Banking Association’s Forecast Panel. Overall growth remains virtually unchanged from the May forecast, but its structure has shifted: the outlook for household consumption, investment, and exports is more favorable, supported by stronger wages, lending activity, and more resilient foreign demand.

The average mortgage rate rose to 4.9%. The July mortgage figures reveal four main trends. First, both the number and volume of new mortgages have stabilized at lower, but still strong, levels. Second, the rise in actual mortgage rates remains gradual compared to market rates. Third, rates on refinanced mortgages no longer deviated downward as significantly as they did in May and June. And fourth, the likely lower share of investment mortgages contributed to a further decline in the average amount of new mortgages.

The Czech National Bank has published two stress tests over the past two months, which at first glance yielded differing results. In the macro stress test from the June Financial Stability Report, the sector’s capital ratio fell to 15.8%, while in the August supervisory stress test, it rose to 18.4%. However, this is not a contradiction per se, but rather a consequence of their different purposes and methodologies. Both tests confirm that Czech banks would be able to weather even an exceptionally deep recession. Below, I analyze the four key differences between these tests.

Stronger industrial growth in June was driven mainly by the energy sector, while auto production stabilized. Exports were a positive surprise, including in key segments (ICT, electronics, and machinery), while higher-priced raw material imports worsened the trade balance. Activity in the construction sector remains weak, but the number of completed apartments in Prague and new construction starts across the Czech Republic increased, despite the continued low number of building permits. However, strong growth in industrial wages does not give the CNB much room to ease policy.

The Bank Board left the interest rate unchanged at 3.75%. The projected rise in the interest rate to 4% was apparently not sufficient for the Bank Board, perhaps due to weaker economic growth, the strong koruna, and lower month-over-month core inflation. Added to this is a communication challenge stemming from the essentially weak growth in overall consumer prices. Inflationary risks persist, even in the context of expected stronger, but less inflationary, economic growth.

While the acceleration in consumer price growth to 1.7% in July was likely accompanied by a return of demand-driven core inflation to 2.9%, this signals a further slight slowdown in its monthly momentum. Furthermore, retail sales declined slightly in June. This combination gives the central bank room to keep interest rates at the current level of 3.75%. However, core inflation remains above the central bank’s inflation target, which will keep it vigilant and open to another interest rate hike to 4%. This is especially true if August consumer prices continue the stronger momentum seen in July.