GT Verdict: Bank Rates Between Forecast and Psychology

If you have been following recent communications regarding monetary policy and the future trajectory of interest rates, you may have noticed an intriguing contradiction. The official forecast appears much more restrictive—that is, anti-inflationary and in favor of higher interest rates—while some members of the Bank Board have suggested in public appearances the possibility of a cautious step down from the current 3.50% level. Meanwhile, the baseline scenario of the analytical mainstream implies rate stability, and even suggests a slight increase over the coming year. This is a significantly different picture than the one painted by financial markets until recently.

The forecast anticipates relatively robust economic growth and only a gradual easing of wage pressures. Although inflation has slowed down considerably, the structure of price developments—particularly in services—remains sensitive to domestic demand and wage dynamics. It is precisely these factors that keep the Bank Board in a state of prudence.

Several forces are currently at play. Wage pressures and higher service prices imply a need to keep rates higher to maintain price stability. Conversely, a stronger koruna dampens imported inflation and creates room for more moderate monetary conditions. On balance, these influences largely neutralize each other. Today, the baseline scenario points toward rate stability in 2026 rather than further cuts. If another reduction were to occur, it would most likely be a technical adjustment toward a neutral level, rather than the start of a new easing cycle.

For households waiting for cheaper mortgages or companies looking for significantly lower borrowing costs, this is not particularly encouraging news. Central bankers have repeatedly signaled that the neutral rate "starts with a three, not a two." In other words, a return to "cheap money" is off the table. At the same time, the Czech National Bank cannot afford to send a signal that the fight against inflationary risks has been definitively won. Reputation and the anchoring of inflation expectations are as vital today as the raw figures in the tables.

The argument is often made that current rate levels are stifling investment. The reality is more complex. The level of interest rates is currently neither the sole nor the primary drag on investment activity. More than the cost of money, companies are dealing with uncertainty regarding future demand, the regulatory environment, and geopolitical developments. As a strongly export-oriented economy, international developments are also crucial for the Czech Republic. Decisions on large-scale projects are thus driven not just by the repo rate, but by the overall risk landscape.

While interest rates remain relatively restrictive, the economy has largely adapted to them. Indeed, forecasted growth suggests that operating at this level is not impossible. Today, investment activity is influenced more by the willingness of loan applicants to take on risk—and the willingness of banks to accept those risks—than by the rate itself. The combination of caution on both sides may ultimately be a more significant factor than a difference of a few dozen basis points.

This applies doubly to small and medium-sized enterprises (SMEs). For credit availability for small firms to improve visibly, the base rate would have to drop by at least another half a percentage point. Even then, the effect would not be automatic. For small businesses, the final rate on a loan agreement is determined by their history, the project’s specific intent and risk, and the bank's capital strength—not just the repo rate itself.

Therefore, rather than waiting for a "miraculous" cut in the central rate, the development of alternative financing might do more to increase the availability of external resources. This could create healthy competitive pressure and hold up a mirror to banks that, in some segments, behave more risk-aversely than necessary.

The most likely scenario for our decision-making is thus a "wait-and-see" approach and rate stability throughout 2026. The debate over rate cuts may return with new forecasts, particularly if inflation and wage dynamics surprise on the downside. Without that, however, the central bank is likely to remain cautious. Yet, this is not necessarily bad news. In an environment where economic decisions are built on trust, stability itself can serve as a valuable anchor.

This text was translated by AI