A new era of fiscal dominance
29/10/2025 17:55:00Following a temporary slowdown, we expect the economy to pick up again next year In 2H25, we forecast a significant deterioration in Czech economic performance, as the impact of US tariffs shifts from positive to negative. However, we expect economic growth in 2026 will be supported by a strong fiscal stimulus from the likely new government. We forecast GDP growth of 2.1% this year, driven by what was a very solid 1H25, before slowing to 1.6% in 2026.
Inflation to fall below 2% in 2026 before rising above the CNB’s target again We expect lower energy and fuel prices, including the effect of the planned transfer of payments for renewable energy sources from households to the state, to push inflation below the central bank’s 2% target next year. However, subsequent price developments are likely to be affected by a recovery in domestic demand driven by expansionary fiscal policy. We estimate inflation of 2.4% in 2025 and 1.5% in 2026.
The central bank is unlikely to lower rates further due to the expected fiscal expansion We no longer expect further cuts in the CNB’s repo rate, which is likely to remain at the current 3.5% for an extended period. The CNB board lists fiscal policy among the main inflationary risks, although we estimate that its recent impact on the economy was roughly neutral.
Fiscal stimulus set to push market interest rates up The economic slowdown should temporarily halt the upward trend in koruna’s interest rates. Next year, fiscal policy easing at national and international levels will contribute to the resumption of this trend.
The koruna set to take a breather The koruna’s current overvaluation, combined with the economy’s near-stagnation in 2H25, should prevent further strengthening. However, we expect this to resume with the revival of economic activity over the course of next year.