The Czech economy accelerated to 0.4% quarter-over-quarter in the second quarter, but its recovery remains less convincing than monthly data had suggested. It therefore poses only a marginal risk to our outlook for a moderate economic recovery, with GDP growth projected at 2.3% year-on-year in 2027 after 2.0% in 2026 (1.9% in the second quarter). Household consumption is lagging behind real wage growth, and business investment in production capacity is weakening. Construction investment and exports, on the other hand, remain a source of support. Furthermore, weak productivity, combined with rapid wage growth, is keeping inflationary pressures high. Labor productivity thus remains a significant weakness of the Czech economy—both for growth and for inflation.

According to Flat Zone statistics, the price of apartments sold in the Czech Republic approached 100,000 crowns per square meter in the second quarter, while in Prague it exceeded 165,000. However, price growth remains stronger than the aggregate figures suggest, as these are dampened by a shift in transactions toward less expensive apartments and regions. Combined with more moderate growth in asking prices and higher market interest rates, this may contribute to a slowdown in the growth rate of actual prices over the course of a year. However, a more significant decline in price momentum will continue to be held back by supply-side constraints and stronger mortgage frontloading.

Economic sentiment in August deteriorated slightly and fell just below this year’s average. However, it still points more toward a gradual recovery of the Czech economy than a significant slowdown. Consumer and business confidence, in particular, took a turn for the worse, with expectations for future economic developments deteriorating. By contrast, industrial confidence improved slightly, and employment expectations have been rising for the second month in a row. From the CNB’s perspective, the combination of improved labor market expectations and heightened price expectations—particularly in the services sector—remains significant and will continue to warrant a hawkish stance.

The Czech Banking Association’s forecasting panel expects the Czech economy to grow by 2% this year. Growth is projected to accelerate to 2.3% in 2027. These expectations are in line with the May forecast, but the structure has changed: the outlook for household consumption, investment, and exports is more favorable, supported by stronger wages, lending activity, and more resilient foreign demand.

The Czech economy will grow by 2% this year and accelerate to 2.3% next year. This is the forecast in the latest outlook from the Czech Banking Association’s Forecast Panel. Overall growth remains virtually unchanged from the May forecast, but its structure has shifted: the outlook for household consumption, investment, and exports is more favorable, supported by stronger wages, lending activity, and more resilient foreign demand.

August 2026: The Czech economy continues to grow steadily, but core inflation pressures will keep interest rates higher

The average mortgage rate rose to 4.9%. The July mortgage figures reveal four main trends. First, both the number and volume of new mortgages have stabilized at lower, but still strong, levels. Second, the rise in actual mortgage rates remains gradual compared to market rates. Third, rates on refinanced mortgages no longer deviated downward as significantly as they did in May and June. And fourth, the likely lower share of investment mortgages contributed to a further decline in the average amount of new mortgages.

The Czech National Bank has published two stress tests over the past two months, which at first glance yielded differing results. In the macro stress test from the June Financial Stability Report, the sector’s capital ratio fell to 15.8%, while in the August supervisory stress test, it rose to 18.4%. However, this is not a contradiction per se, but rather a consequence of their different purposes and methodologies. Both tests confirm that Czech banks would be able to weather even an exceptionally deep recession. Below, I analyze the four key differences between these tests.

Stronger industrial growth in June was driven mainly by the energy sector, while auto production stabilized. Exports were a positive surprise, including in key segments (ICT, electronics, and machinery), while higher-priced raw material imports worsened the trade balance. Activity in the construction sector remains weak, but the number of completed apartments in Prague and new construction starts across the Czech Republic increased, despite the continued low number of building permits. However, strong growth in industrial wages does not give the CNB much room to ease policy.

The Bank Board left the interest rate unchanged at 3.75%. The projected rise in the interest rate to 4% was apparently not sufficient for the Bank Board, perhaps due to weaker economic growth, the strong koruna, and lower month-over-month core inflation. Added to this is a communication challenge stemming from the essentially weak growth in overall consumer prices. Inflationary risks persist, even in the context of expected stronger, but less inflationary, economic growth.

While the acceleration in consumer price growth to 1.7% in July was likely accompanied by a return of demand-driven core inflation to 2.9%, this signals a further slight slowdown in its monthly momentum. Furthermore, retail sales declined slightly in June. This combination gives the central bank room to keep interest rates at the current level of 3.75%. However, core inflation remains above the central bank’s inflation target, which will keep it vigilant and open to another interest rate hike to 4%. This is especially true if August consumer prices continue the stronger momentum seen in July.

The CNB is likely to keep the two-week repo rate at 3.75% in August. However, the ECB’s wait-and-see approach is not a definitive guide for Czech monetary policy: domestic core inflation, the labor market, and lending activity are having a more inflationary effect. However, it is not just mortgages that are driving Czech lending; there is also a noticeable recovery in investment loans, which could ease inflationary pressures on the supply side. If service prices start rising again in July and August, the Bank Board may raise the rate to 4% on September 17. Markets are pricing in interest rate hikes by both the CNB and the ECB this fall.

The brisk pace of lending activity continues, and payment behavior is very good

Although confidence in the Czech economy improved only slightly in July, it did so for the second month in a row, confirming its resilience despite heightened geopolitical uncertainty. Positive signals are coming mainly from the industrial sector, where assessments of demand and capacity utilization are improving, as well as from employment expectations. At the same time, declining price expectations are easing the CNB’s concerns about persistent inflationary pressures; however, the return of higher oil prices does not yet give the central bank a reason to deviate from its rather hawkish communication.

The CNB’s survey of banks’ lending conditions for the second quarter came as no surprise; the most significant change concerned housing loans. The central bank’s stricter criteria for investment mortgages tightened not only the banks’ lending requirements. In line with historical experience, this supported demand, likely temporarily. The impact on lending conditions was partially offset by lower bank margins and more favorable repayment terms. In an environment of continued strong competition, the stronger demand helped mitigate the impact of the spike in market interest rates on mortgage rates, which consequently rose more modestly. However, expectations of weaker demand for housing loans in the third quarter are changing this narrative. Surveys on consumer and business loans are also likely to keep the CNB’s outlook on the hawkish side.

The average interest rate on new mortgages rose to 4.79%, while the average mortgage amount fell back below 4.7 million crowns. Banks and building societies issued new mortgages (excluding refinancing) totaling 36.5 billion crowns. After months of exceptionally strong mortgage activity, June saw a clear return to the robust normal levels seen in the second half of last year. In the first half of the year, the volume of new mortgages reached 216 billion crowns, which is 66 billion more than last year. Higher market interest rates and expensive real estate remain the main obstacles.