Czech National Bank Keeps Policy Rate at 3.5% as Inflation Signals Diverge

The Czech National Bank (CNB) opted to hold its key two-week repo rate at 3.5% at Thursday's policy meeting, maintaining the pause in the bank's monetary easing that began in mid-2025. The decision was consistent with market expectations and leaves the discount rate at 2.5% and the Lombard rate at 4.5%.

Officials framed the choice as a cautious step amid mixed inflation indicators. Headline inflation is expected to decline to 1.6% in January 2026, a level described as a nine-year low, a movement the central bank attributes primarily to falling energy costs. At the same time, measures of underlying inflation have not eased uniformly.

Core inflation has started to tick higher, and services inflation remains elevated at around 4.7%, reflecting persistent domestic price pressures. Those divergent trends appear to be central to the CNB's deliberations as policymakers weigh the case for further moves in either direction.

Prior to the pause in mid-2025, the CNB had been in a cycle of rate cuts. Thursday's decision indicates that the central bank is balancing the evidence of substantially lower headline inflation driven by energy price declines against the countervailing signal of sticky core and services inflation before committing to additional monetary easing.

Implications for markets and the economy

• Financial markets will interpret the hold as signaling a patient approach to policy, with the CNB awaiting clearer evidence on whether core inflation moderates.
• Energy-related price declines are the primary factor behind the anticipated drop in headline inflation to 1.6% in January 2026.
• Persistent services inflation at about 4.7% underscores ongoing domestic inflationary pressures that could complicate decisions about future rate reductions.

The CNB's stance underscores the tension between easing headline inflation and more robust underlying price dynamics. Policymakers appear to be reserving judgment, preferring to see whether core and services inflation trajectories moderate before undertaking further changes to monetary conditions.