Czechs Set to Hold Rates as Government Plans Blur Inflation Path

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(Bloomberg) — The Czech central bank is set to hold borrowing costs as the new government’s policy priorities blur the inflation outlook and investors curb expectations of an interest rate hike next year.

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Policymakers in Prague will keep the benchmark rate at 3.5% for a fifth meeting on Thursday, according to all analysts in a Bloomberg survey.

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Officials are weighing softer-than-expected headline inflation — and prospects of a further slowdown next year — against robust consumer spending, rising property prices and a lack of detail about the state budget. 

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The new government, led by billionaire Andrej Babis, this week approved a plan to lower electricity bills for households and companies. The move may push overall price growth below the 2% goal next year, while effectively leaving more cash in people’s pockets and potentially fueling services inflation that the central bank has flagged as a key concern.

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Core inflation — a key gauge of demand driven price growth — will likely hover around 2.5% over the coming year, supported by extra discretionary spending and keeping the central bank on hold despite headline inflation “marginally below the target,” according to ING Bank NV. 

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“In any case, policymakers will decide in a challenging environment, with headline inflation below the target but core inflation likely remaining somewhat elevated,” said ING’s Chief Economist for the Czech Republic David Havrlant and strategist Frantisek Taborsky.

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While money markets prices earlier this month indicated bets on a quarter-point interest rate hike in a year’s time, the November headline inflation reading and the government’s plan to lower power costs prompted investors to curb those wagers.

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Central bank Governor Ales Michl has steered clear of indicating a longer-term direction for rates, repeatedly saying that the board will keep all options open for future decisions. Several members of the rate-setting panel, though, have signaled that borrowing costs may stay unchanged for all of next year.

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A potential decline in the headline inflation rate below the target, as a result of administrative changes in energy prices, shouldn’t be a reason for the central bank to lower rates, policymaker Jan Kubicek said last week.

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The Czech koruna has benefited from higher interest rates than eurozone, although it’s pared some gains amid a recent slide in local market rates. Still, it remains one of the best performing currencies in emerging markets this year, both against the euro and the dollar.

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The koruna may strengthen further in 2026, albeit at a more moderate pace than this year’s advance, according to Dominik Rusinko, chief economist at KBC Group NV’s Patria Finance brokerage in Prague.

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“The combination of stable rates at 3.5%, and a favorable interest rate differential will continue to represent a strong supporting factor for the koruna,” he said. “Prevailing inflationary risks — persistent services inflation, still swift wage growth and the booming property market — will keep the central bank in a hawkish mode.” 

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