The Czech National Bank (CNB) increased its key interest rate on Thursday for the first time in four years, aiming to contain inflationary pressures driven by strong wage growth, expanding lending activity, rising service-sector prices, and the economic impact of the conflict involving Iran.

The central bank raised its two-week repo rate by 25 basis points to 3.75%. The decision received support from six members of the board, while one member preferred to leave rates unchanged. Financial markets had widely anticipated the move and continue to price in the possibility of another increase before the end of the year.

Most economists surveyed by Reuters had also expected the rate hike, although some viewed it as a one-time adjustment. When asked whether the increase would be sufficient or could eventually be reversed, CNB Governor Aleš Michl stated that all options remain on the table.

“We will continue to assess whether the Czech economy remains in a low-inflation environment and carefully evaluate any future policy actions,” Michl said.

Persistent Core Inflation

According to Michl, core inflation remains elevated, and updated forecasts suggest overall inflation could temporarily rise toward the end of the year, supporting a tighter monetary policy stance.

He noted that growth in credit and government borrowing is increasing the money supply, while a tight labour market continues to generate strong wage growth. Service-sector prices remain a key contributor to inflationary pressures.

Annual inflation stood at 2.1% in May, close to the CNB’s 2% target. However, service-sector inflation remained near 5%, while core inflation reached 2.9%.

Nominal wages grew by more than 8% during the first quarter, marking the strongest increase in three years.

Easing Expectations for Further Rate Increases

Earlier this year, money markets anticipated as many as four rate hikes over the next twelve months. However, those expectations have moderated after the United States and Iran reached an interim agreement this week to end their conflict.

The war had disrupted oil and gas shipments through the Strait of Hormuz, causing energy prices to surge. Following the agreement, oil prices fell below $80 per barrel after previously exceeding $100.

Fiscal Risks Remain a Concern

Michl also highlighted the risk that a larger government budget deficit could add to inflationary pressures. His comments placed greater emphasis on fiscal policy risks than in previous assessments, suggesting that government spending will remain an important factor in the CNB’s inflation outlook (Reuters).

In addition, higher interest rates are likely to increase the demand for the koruna and, if the central bank signals that further tightening may be required to contain inflation, the currency could strengthen further (Trading Economics).

Source:

Reuters, https://www.reuters.com/business/czech-central-bank-delivers-first-rate-hike-four-years-2026-06-18/

Trading Economics, https://tradingeconomics.com/czech-republic/interest-rate/news/560098