Czech National Bank raises rates and cuts growth forecast as inflation risks rise

The Czech National Bank raised its benchmark interest rate by a quarter of a percentage point to 4 percent Thursday, confirming the move widely anticipated by financial markets.

The increase takes the two-week repo rate to its highest level since early 2025. It is the bank’s second increase this year, following June’s rise from 3.5 to 3.75 percent.

Analysts said the decision responds to persistent inflation risks, despite October’s slight slowdown in annual price growth. The crown showed little immediate reaction because markets had already priced in the increase.

The bank also raised its other two main rates by a quarter-point. The Lombard rate, used for central bank lending against collateral, increased to 5 percent, while the discount rate rose to 3 percent.

The decision passed narrowly, with four board members backing the increase and three voting to leave rates unchanged, Governor Aleš Michl said. He cited persistent underlying inflation, rapid wage growth and risks from expanding lending to households and government institutions.

The bank also cut its growth forecast to 1.7 percent for 2026, down from 2.2 percent, and to 2.5 percent for 2027, previously 2.7 percent. It now expects inflation to average 3.2 percent next year, 0.7 percentage points above its August forecast, before easing to 2.3 percent in 2028.

Markets are still pricing in three further quarter-point increases over the next year, according to Dufek. That represents investor expectations rather than a commitment from the central bank; he said January’s inflation figures would be particularly important in determining its next steps.

Portu analyst Jan Berka similarly said the governor’s comments and new forecast could move the crown more significantly than Thursday’s announcement.

The decision follows preliminary figures showing annual inflation eased to 2.4 percent in October from 2.5 percent in September. Economists nevertheless expect higher energy costs and other price pressures to push inflation above 3 percent next year.

Higher central bank rates can increase borrowing costs and support better returns on bank deposits, but the effects are neither immediate nor uniform.

Bohumil Žitný, a strategist at Žitný a partneři, expects the increase to gradually influence lending and deposit rates, potentially improving returns for savers while making mortgages and consumer borrowing more expensive.

Other analysts cautioned against expecting a substantial immediate change.

Fingood CEO Ondřej Kozel said savings-account rates respond only weakly to increases in the central bank’s benchmark. Mortgage pricing, meanwhile, depends more heavily on longer-term market rates.

OVB Allfinanz analyst Michael Opočenský emphasized that distinction: ČNB sets a two-week rate, whereas mortgage lenders look particularly at longer-term rates, including three-year interest-rate swaps. Those have remained relatively stable since mid-September, he said.

ČNB began cutting rates from 7 percent in December 2023, eventually reaching 3.5 percent in May 2025. This year’s two increases mark a reversal as the bank confronts renewed inflation risks.