Commentary by Miroslav Zámečník, Chief Advisor to the Czech Banking Association

The Czech household savings rate remained at 20% in the first quarter of this year, still high even by international standards. Household disposable income slowed to 0.7% quarter on quarter, while property prices continued to rise by roughly 2%. The GDP revision showed weaker household consumption, but also a less negative productivity story thanks to stronger value added in industry. However, despite somewhat more moderate growth in the past, unit labour costs remain on a strong upward trend, which, together with high core inflation growth, is unlikely to bring a dovish turn at the CNB. That said, my interpretation of the new data from the Czech Statistical Office, especially for the first quarter, is significantly affected by the alignment of quarterly figures with the new annual data for 2025. The next quarterly release may therefore bring yet another story about the economy in the first quarter.

Economic confidence improved slightly in June. Stronger sentiment among households and manufacturers outweighed continued weakness in retail trade, although retail conditions may improve over the coming months. At the same time, the services sector points to higher risks for both unemployment and core inflation—that is, inflation excluding the volatile prices of energy and food. For the Czech National Bank (CNB), the June sentiment survey suggests a need for caution, reflecting stronger household demand and a renewed rise in price expectations in services.

The Bank Board raised the interest rate by a quarter of a percentage point to 3.75%. Unsurprisingly, the main reason was the continued high growth in demand-driven, or “core,” inflation, which reflects stronger wage growth. However, the decision also reflects stronger credit growth and rising real estate prices. I view today’s decision as an effort by the central bank to keep consumer inflation in line with its inflation target over the longer term, which is not possible with core inflation hovering around 3%. Today’s decision reduces the risk premium—or rather, the uncertainty regarding the credibility of achieving the inflation target and the central bank’s independence. Below, I discuss further possible steps and their implications for the economy and the banking sector. If energy prices remain lower, this will reduce the likelihood of the CNB reaching a 4% interest rate. However, core inflation must lose momentum for the CNB to avoid reaching that level.

While the growth in actual apartment prices slowed to approximately 2.5% quarter-over-quarter in the first quarter, with significantly different trends between Prague and the rest of the country, However, even the current milder growth does not yet suggest a significant slowdown in year-over-year apartment price growth this year. Asking prices do not indicate this yet. This is especially true if there is a shift of pent-up demand for more expensive Prague apartments to the regions. Data from Flat Zone show an average transaction price of CZK 98,000 per square meter for apartments in the first quarter. Stricter criteria for so-called investment mortgages, as well as higher mortgage interest rates, may further cool the real estate market; however, higher wage growth keeps real mortgage interest rates negative.

In May 2026, banks and building societies actually issued new mortgages (excluding refinancing) totaling CZK 38.1 billion.

Consumer price inflation slowed to 2.1% year on year in May, close to the CNB's target. However, domestic inflationary pressures continue to operate beneath the surface. Core inflation remained at 2.9% y/y and its short-term dynamics suggest an acceleration closer to 4%. The latest economic numbers do not suggest a reversal and thus a relief of the inflationary nature of the Czech economy due to strong wage growth and weak productivity growth. This constellation, together with the ongoing Iranian conflict, reinforces the rationale for a 0.25 percentage point increase in the central bank's interest rate to 3.75% at the June meeting. This will not be an easy decision for the Board.

April's monthly figures open the way for stronger GDP growth in Q2 for now, after slowing to 0.2% q-o-q in Q1. The April industrial numbers are 1.8% above the first quarter average thanks to the April rebound. Despite a slight April decline, the construction sector is on an uptrend, thanks in part to strong housing starts, which rebounded from weaker building permits. Moreover, its sentiment does not suggest a change in trend. Foreign trade reached its lowest surplus below CZK4bn since the end of the energy crisis in 2022. However, this mainly reflects higher non-energy imports, while export activity also showed solid growth thanks to ICT. Thus, net exports are unlikely to drive GDP, similar to the first quarter when their weaker contribution was offset by stronger investment activity.

The countercyclical capital buffer should rise to 1.5% from July 2027, which will increase banks' total capital requirements to around 17% next year, in response to continued growth in lending to households and firms and lower perceived risks in the banking sector. Again, we are also seeing stronger wage growth outpacing productivity. In the case of rising investment credit, however, this is a dilemma for macroprudential policy. In addition to the financial cycle, the results of stress tests, including concerns about the interconnectedness of the banking and government sectors, are likely to have factored into the decision. It leaves mortgage rules unchanged.

April's decline in retail sales was largely the result of a correction of the previous strong growth in fuel and food. Although the correction after a strong March was also evident in core retail sales, they maintained their growth momentum, confirming the continued willingness of households to spend, supported by real wage growth and credit activity. However, factors are beginning to emerge in the second quarter that may slow the pace of household consumption. We discuss three of them below - real wage growth, credit activity and retail bonds.

Consumer price inflation slowed to 2.1% in May, surprising at a more moderate pace than the market had expected. However, some of the factors now dampening inflation may not be permanent. This is particularly true for food prices, which may be affected by rising global commodity prices in the months ahead. At the same time, strong wage growth of 8.1% year-on-year is divorced from labour productivity, creating pressures for higher core inflation. It is the contradiction between low headline inflation and persistent domestic inflationary pressures that poses a non-trivial economic and political dilemma for the CNB.

The Czech economy grew by 0.2% quarter-on-quarter in Q1. The weaker result was mainly due to technical factors, including the negative contribution of net exports and the budget provisionality. However, the structure of growth remains favourable thanks to continued growth in household consumption, investment and exports. In addition to the Iran war, weaker industry and persistent wage inflation pressures with slower productivity growth pose risks to the recovery to 2% economic growth this year.

The domestic economy will grow by 2% this year. The CBA forecasting panel worsened the outlook due to the events in Hormuz. The forecast from the first quarter predicted growth of 2.6%. Consumer inflation should accelerate towards the upper limit of the inflation target at the end of this year.

Slightly worse sentiment in May hides a drop in expected large purchases by consumers. If they translate into worse retail sales results in the coming months, these more modest plans would pose a downside risk to the 2% growth outlook for the Czech economy this year. This is based on a stable growth of almost 3% in household consumption. Other details reveal a slight correction in price expectations, which mitigates upside risks to inflation. The labour market receives a neutral report given its recent trend, i.e. slightly negative.

May 2026: Economic growth slowing to 2% with risks on many fronts, 2.4% growth next year

This year is bringing a strong wave of expiring mortgage rate fixations, while the shorter fixation periods agreed in recent years will further increase these volumes in the years ahead. Building on the central bank’s latest estimate that mortgage fixations worth an average of CZK 534 billion per year will expire between 2026 and 2028, we present alternative interest-rate shock scenarios depending on the path of mortgage rates. In 2027–2028, the negative interest-rate shock is expected to ease to 0.1–0.6 percentage points, down from 1.1–1.4 percentage points this year. However, we also outline a more adverse scenario involving a stronger interest-rate shock. This year, the negative interest-rate shock affecting expiring mortgage fixations from the low-rate period will amount to roughly 3.5% of the average household income of mortgage applicants, although across all households the average impact will be about half that level. In both cases, the expected real growth in wages and salaries should be sufficient to offset the shock.