Favourable Czech inflation sharpens focus on June CNB meeting

Czech headline inflation slowed to 2.1% in May, coming in below market expectations but in line with the Czech National Bank's spring forecast. Core inflation is estimated to have eased to 2.8%, in line with both ING and CNB expectations. Annual price dynamics of both goods and services slowed down in May. The foodstuffs segment showed a twofold dynamic, with processed food prices remaining benign while unprocessed food prices recorded both monthly and annual increases, pushed up by elevated energy prices.

Annual wage dynamics quickened to 8.1% in the first quarter of 2026, delivering an increase of 6.4% in real terms. That said, the wage level throughout 2024-25 was revised downward. This brings the 1Q26 wage level roughly in line with our expectations, despite stronger quarterly and annual dynamics following the revisions.

In any case, wage dynamics represent a substantial input to CNB’s decision function, with solid wage growth potentially justifying tighter monetary policy. Nevertheless, the employment rate in the 15-64 age group remained unchanged over the year despite solid economic expansion. Unemployment increased from the previous year, including the long-term component. Businesses are looking for employees with different skills than those available in the free labour force, and this long-lasting mismatch is deepening with the advent of new technologies.

With headline inflation close to the target, softening core inflation along with price dynamics in the service sector, we still see no change to the policy rate as the right answer to the current state of the Czech economy and the outlook. Continued tensions surrounding the Strait of Hormuz may still prompt weakness in the global economy and waning demand for Czech exports – likely materialising in the second and third quarters – alongside dwindling preliminary indicators and subdued real GDP figures. Given the mismatches in the labour market, another bleak period for manufacturing would result in a rise in the unemployment rate; the services sector seems largely saturated when it comes to further absorption of the free labour force.

Yet, in light of the latest hawkish comments from CNB board members, a June hike certainly cannot be ruled out – particularly as factors like ample wage growth or signs of an overheating economy could be used to justify such a move. We take the position that the CNB isn't currently under pressure to tighten the monetary policy setup. To wait and gain a thorough understanding of the full impact of recent geopolitical developments on economic activity and the labour market is something of a luxury worth taking advantage of. At this point, we await further commentary, with forward guidance set to serve as a subtle but powerful art in what's likely to be a lively CNB meeting. In short, no change to rates remains our base case – although we are ready to adjust our view should a more decisively hawkish tone emerge.