Given the latest hawkish statements from the CNB board, we have changed our call for the central bank’s June meeting from rate stability to a 25bp hike. This would take the key repo rate to 3.75%. However, the board’s statements indicate that the June hike would not necessarily mark the start of a new tightening cycle. We therefore expect the June hike to be a precautionary measure, putting the central bank in a stronger position amid rising inflationary risks. Following the June hike, we expect the repo rate to remain at 3.75% for the rest of this year and throughout next year. This is due to the robust economy and fiscal policy, which is likely to be more expansionary in 2027 than we previously thought. If energy and other raw material prices remain persistently high, however, we think that one hike will be insufficient and more will have to follow.

Given the latest hawkish statements from the CNB board, we have changed our call for the central bank’s June meeting from rate stability to a 25bp hike. This would take the key repo rate to 3.75%. However, the board’s statements indicate that the June hike would not necessarily mark the start of a new tightening cycle. We therefore expect the June hike to be a precautionary measure, putting the central bank in a stronger position amid rising inflationary risks. Following the June hike, we expect the repo rate to remain at 3.75% for the rest of this year and throughout next year. This is due to the robust economy and fiscal policy, which is likely to be more expansionary in 2027 than we previously thought. If energy and other raw material prices remain persistently high, however, we think that one hike will be insufficient and more will have to follow.

We have made a last-minute change to our CNB call and now expect a 25bp hike at the 18 June meeting, with the repo rate remaining at 3.75% for an extended period since then. While we had previously forecast the CNB to continue to keep interest rates on hold in June, we changed our mind following an abrupt hawkish turnaround in the central bank’s communication.

The hawkish CNB statements came just shortly before the blackout period, or in the case of Governor Michl’s interview for Bloomberg even a day after the blackout period has started. In a written and also live interview on Bloomberg TV, Governor Michl said that “the case for a rate hike has strengthened” and that “a June move is now a live possibility”. At the same time, however, he added that “if we do hike, my baseline is that we may then enter a period of assessment for some time”. Two days before Governor Michl, other CNB board member Jan Prochazka had spoken in a similar manner to Reuters. He mentioned that the June meeting was split 50-50 between holding rates steady and raising them by 25bp. Regarding further rate moves, he stated that “if something is going to be done, then I can really imagine one (rate increase), which will be relatively quickly reversed, but you do it because you do not know what will follow”. Moreover, rumours about hawkish statements from some CNB board members have been circulating in the markets over the last two weeks. However, until the last-minute official statements from Michl and Prochazka, the CNB had been virtually silent since the last May meeting, when the communication was very different. Although the governor admitted at the press conference that a rate hike was a possibility for future meetings, the CNB particularly emphasised its favourable starting position, giving the central bank time to assess the situation. Therefore, the CNB board’s current indication of an imminent need for a rate hike is in stark contrast to their cautious communication thus far.

The latest inflation figures may have increased pressure on the central bank. Headline inflation declined unexpectedly strongly in May, falling from 2.5% to 2.1% yoy. While inflation was 0.1pp above the CNB forecast in April, it aligned with the central bank’s expectation in May. However, the decline in inflation in May was partly driven by the different timing of Easter, affecting food price growth through the base effect. Core inflation remained unchanged for the third consecutive month at 2.9% yoy in May, exceeding the CNB’s estimate of 2.8% and being on the sight of the 3% upper limit of its tolerance band around the 2% target. Nevertheless, the elevated core inflation was mainly due to the booming property market. This already represents a structural issue of the Czech economy, driven by a lack of housing supply. However, the impact of this on inflation, through rising imputed and paid rents, is now being strengthened by renewed growth in building material prices. Excluding imputed and paid rents, we estimate that core inflation eased from 1.9% to 1.8% yoy in May. We analysed the latest inflation print here: https://bit.ly/CPI_May26_EN, where we also comment on our inflation forecast.

Markets have fully priced in a 25bp hike in the CNB’s rates at the upcoming June meeting, with further policy tightening expected until year-end. Following recent rumours that some CNB board members had made strong hawkish statements at investor meetings, markets have revised their view of the June meeting. They have also been betting on further policy tightening in the rest of the year, expecting the repo rate to increase to 4.25-4.5% from the current 3.5%. However, following the statements implying that the June hike would not necessarily mark the start of a new tightening cycle, market expectations have been revised down to a year-end repo rate of 4.0-4.25%. This seems more reasonable to us than the previous pricing, given the CNB board’s history of pursuing a cautious approach, fear of policy mistakes and tendency to take a smooth path with interest rates. Furthermore, based on previous steps, we can hardly describe the bank board as forward-looking, which the pricing of a swift tightening campaign would imply. In fact, the market pricing of a 25bp hike in June could bind the board to some extent. If it were not to deliver this, the koruna could weaken, adding pressure on imported inflation.

Following the interest rate hike in June, we expect the CNB to keep the repo rate at 3.75% for an extended period. However, if the conflict in the Middle East proves to be long-lasting and leads to persistently higher energy and other raw material prices, the 25bp rate hike will not solve anything and further increases will need to come. If the June hike happens, it is likely to be a precautionary measure, putting the central bank in an even better position to face increased inflationary pressures. Meanwhile, fiscal policy remains the reason for maintaining a restrictive repo rate for an extended period in our forecast. Fiscal expansion next year is likely to be stronger than we previously thought, giving us a reason why not to hurry with cuts to the repo rate’s policy-neutral level of 3% in our forecast. We continue to not expect a gradual return to 3% before 2028. Naturally, there are still many unknown factors at play. The key one remains the duration of the conflict in the Middle East and its subsequent impact on inflation vs economic growth.

Annual General Meeting

At today’s Annual General Meeting, Kofola shareholders will approve the board of directors’ proposal to pay a dividend of CZK21 per share, among other things. The meeting will take place on June 17, 2026, at 10:00 a.m.

The CZK21 dividend offers a gross yield of +4.0%. The record date is expected to be Friday, June 26, 2026. This means that Wednesday, June 24, 2026, will be the last trading day with the right to receive the dividend.

End of Partnership with PepsiCo in the Adriatic Region

Kofola announced that it will end its partnership with PepsiCo in Slovenia and Croatia on January 1, 2027. Kofola currently operates as a Pepsi bottler and distributor. We expect this change to result in a slight decline in revenue in the low single-digit percentage range. Kofola will replace Pepsi products with its own brands. Furthermore, the margin on sales of its own beverages will be significantly higher than the current margin on Pepsi products.

Kofola has already experienced a similar situation when it ended its partnership with Rauch and replaced their juices with its own brands.

Annual General Meeting

At today’s Annual General Meeting, Kofola shareholders will approve the board of directors’ proposal to pay a dividend of CZK21 per share, among other things. The meeting will take place on June 17, 2026, at 10:00 a.m.

The CZK21 dividend offers a gross yield of +4.0%. The record date is expected to be Friday, June 26, 2026. This means that Wednesday, June 24, 2026, will be the last trading day with the right to receive the dividend.

End of Partnership with PepsiCo in the Adriatic Region

Kofola announced that it will end its partnership with PepsiCo in Slovenia and Croatia on January 1, 2027. Kofola currently operates as a Pepsi bottler and distributor. We expect this change to result in a slight decline in revenue in the low single-digit percentage range. Kofola will replace Pepsi products with its own brands. Furthermore, the margin on sales of its own beverages will be significantly higher than the current margin on Pepsi products.

Kofola has already experienced a similar situation when it ended its partnership with Rauch and replaced their juices with its own brands.