This analysis estimates the impact of temporary and permanent increases in oil prices of various magnitudes on the Czech economy, inflation, interest rates and the koruna exchange rate. In general, our estimate suggests that a temporary 10% increase in oil prices would have only a limited impact on GDP growth and inflation. However, a permanent increase of the same magnitude would lead to visible inflationary pressures, higher interest rates and increased government bond yields, accompanied by a more significant weakening of the koruna. Nevertheless, the actual response may currently be milder than the results presented, given the Czech economy’s gradually declining energy intensity. The volatility of the koruna exchange rate is also less pronounced than in the past, while depreciation is an important factor in transmitting the oil shock to final prices.

This analysis estimates the impact of temporary and permanent increases in oil prices of various magnitudes on the Czech economy, inflation, interest rates and the koruna exchange rate. In general, our estimate suggests that a temporary 10% increase in oil prices would have only a limited impact on GDP growth and inflation. However, a permanent increase of the same magnitude would lead to visible inflationary pressures, higher interest rates and increased government bond yields, accompanied by a more significant weakening of the koruna. Nevertheless, the actual response may currently be milder than the results presented, given the Czech economy’s gradually declining energy intensity. The volatility of the koruna exchange rate is also less pronounced than in the past, while depreciation is an important factor in transmitting the oil shock to final prices.

Oil is a major source of energy, but the energy intensity is declining

Oil prices are a significant external macroeconomic factor that can affect the functioning of a small open economy quickly and significantly. Unexpected fluctuations in oil prices typically feed through to production and transportation costs, and subsequently to inflation and the wider economy. Ultimately, these fluctuations can potentially impact monetary policy settings. The impact of oil shocks can be amplified by the energy intensity of the economy or the structure of energy imports. In small open economies, such as the Czech economy, channels related to the exchange rate also play a significant role. This analysis aims to quantify the impact of an oil shock on the domestic economy, inflation, interest rates and the koruna exchange rate, and discuss possible scenarios in the context of the ongoing conflict in the Middle East.

Oil accounts for the largest proportion of total final domestic energy consumption, at 37%. Over the past two decades, its share has risen slightly at the expense of coal, natural gas and district heating. From an international perspective, the Czech Republic's oil consumption share is comparable to that of neighbouring countries. However, Czech assets are perceived as risky in relation to oil prices, given the country’s near-total dependence on oil imports.

The energy intensity of the Czech economy is declining. Over the past ten years (up to 2024), it has fallen by more than a fifth cumulatively. This was likely driven by the declining share of industry in total value added, as well as further energy savings within the economy. Therefore, we consider the empirical impacts of rising oil prices presented below, estimated using longer time series, to be their upper bound. However, if the conflict in the Middle East is not resolved soon, or if the Strait of Hormuz remains closed, there is a risk of not only higher oil prices spilling over into the economy (’a classic oil shock’), but also broader disruptions to global supply chains, which this analysis does not take into account.

The oil shock is pushing up inflation and interest rates, while also weakening the koruna

In a small open economy, rising oil prices primarily affect the economy through cost, demand, exchange rate and financial channels. Rising oil prices increase firms’ production costs, leading to higher energy and transportation prices which directly feed into consumer inflation. At the same time, the higher cost burden dampens investment activity and real household income, resulting in a slowdown in GDP growth. For an economy with significant energy import dependence, one would also typically expect exchange rate depreciation due to worsening terms of trade and investor sentiment. Financial markets usually respond to an oil shock by raising the risk premiums on bonds issued by emerging economies, especially net importers of energy commodities. For these countries, an oil shock may therefore also result in tighter financial conditions and higher financing costs.

Pressure on the domestic currency may be exacerbated by the central bank’s limited response. In the event of a negative supply shock leading to higher prices and lower economic output, the central bank is faced with an unpleasant dilemma. It could respond as it would to a positive demand shock by raising interest rates. However, this would not only reduce inflation, but also exacerbate the negative impact on the real economy (including rising unemployment). The second option in the case of supply shocks is to apply an exemption from the inflation target. This means that the central bank does not take supply shocks into account when setting monetary policy and temporarily tolerates the resulting deviation of inflation from the target. However, at the same time, the central bank risks unanchoring inflation expectations and undermining the credibility of the inflation target, particularly if supply shocks persist over a longer period.

A sustained rise in oil prices is not the base case scenario

Prices for Brent crude settled near 100 USD/bbl in March. If prices were to remain at this level, the average for 1Q26 would represent an increase of approximately 22% compared 4Q25 (with an average price in 1Q26 of 77 USD/bbl). In 2Q26, oil remaining at 100 USD/bbl would imply a qoq increase in the average price of nearly 30%. However, the futures curve shows a steep downward slope (backwardation). This suggests that markets are still leaning toward a scenario where oil prices will fall again once the risk premium subsides. The futures curve for the next two years has nonetheless risen by an average of roughly 25% over the past month. While the price of the nearest contracts is more than 50% higher, the increase over the longer term is approximately 15%. SG economists also assume in their baseline scenario that oil prices will gradually decline to an average of 68 USD/bbl in 4Q26.

Below, we present the impact of a 10% temporary and permanent oil shock. The responses are based on an empirical BVAR model, the structure of which is described in more detail in the Appendix. A temporary shock is defined as an increase in the average oil price for one quarter, after which it returns to the initial level. A permanent shock is defined as a situation in which the oil price rises and remains at a higher level. In our view, these two scenarios should cover the majority of possible outcomes for a given shock magnitude. The true response is therefore likely to fall within this range.

The impact on real GDP is less pronounced than the impact on inflation. Our estimate suggests that a temporary shock leading to a 10% increase in oil prices would typically result in a negligible decline in Czech GDP. A permanent rise in oil prices of the same magnitude, however, results in a reduction in annual GDP growth of 0.1–0.2pp in the following years, with a cumulative loss of approximately 0.6pp. This limited impact on economic activity is likely due to the weakening of the koruna, which has an expansionary effect on the economy, and the central bank’s delayed and partial response to the oil shock. Consequently, the negative impact on GDP is also only observed after a delay.

Year-on-year inflation temporarily rises by up to 1pp following a sustained 10% increase in oil prices. In addition to the direct impact on fuel (which account for about 3% of the CPI basket) and transportation costs, a long-term shock also results in a general increase in costs across other categories. This spillover effect is significantly amplified by the weakening of the koruna (temporarily by more than 1.5%), which is characterised by strong persistence in the event of a permanent oil price shock.

The oil shock is also pushing up interest rates. Once again, the response to a permanent shock is more significant. According to our estimates, a permanent 10% increase in oil prices leads to a gradual rise in short-term interest rates of up to 40bp. There is likely to be a certain lag in the central bank’s response, due not only to the delay in macroeconomic data, but also to the supply-side nature of the shock and uncertainty regarding its duration. According to the simulation, the yield on a 10-year CZGB rises by a similar amount to the short-term interbank rate, but more quickly. This is probably due to an increase in risk and term premiums on emerging market assets in financial markets amid heightened uncertainty.

When assessing the impact of the current Middle East conflict on the Czech economy, it is important to consider not only the price of oil itself, but also how long it remains at elevated levels. The charts below illustrate the impact of various combinations of shock duration (temporary vs. permanent) and magnitude.

We expect Colt CZ’s 4Q25 results to continue reflecting weakness in the U.S. commercial market, which is key for the company. We anticipate consistently strong performance from Colt’s ammunition sector. For 4Q25, we estimate a 17.5% yoy decline in EBITDA to CZK1.3bn. Revenue is expected to be 6.3% lower yoy at CZK6.9bn. For the full year, EBITDA is expected to be CZK4.7bn (+2.9% yoy) on revenue of CZK23bn (+2.8% yoy). This would meet Colt’s full-year goals.

Announcement date: Wednesday, March 25, 2025, before the market

We expect Colt CZ’s 4Q25 results to continue reflecting weakness in the U.S. commercial market, which is key for the company. We anticipate consistently strong performance from Colt’s ammunition sector. For 4Q25, we estimate a 17.5% yoy decline in EBITDA to CZK1.3bn. Revenue is expected to be 6.3% lower yoy at CZK6.9bn. For the full year, EBITDA is expected to be CZK4.7bn (+2.9% yoy) on revenue of CZK23bn (+2.8% yoy). This would meet Colt’s full-year goals.

4Q25 Results: The U.S. civilian market is crucial for the firearms segment. According to available data, the market declined by nearly 13% yoy. It is expected to account for about a quarter of Colt’s total revenue for 4Q25. We anticipate stable performance from the ammunition division. Strong numbers are expected, particularly in Europe. We estimate Colt’s revenue for 4Q25 at CZK6.9bn, a 6.3% yoy decline. EBITDA is expected to reach CZK1.3bn (-17.5% yoy). These figures align with Colt’s guidance of revenue between CZK7-8.5bn and EBITDA between CZK1.1-1.3 bn. We expect the net profit for the fourth quarter of last year to be CZK629m, which is a 1.8% yoy decrease.

2025 Results: We expect full-year revenue to increase by +2.8% yoy to CZK23bn. We estimate EBITDA at CZK4.7bn, a +2.9% yoy increase. Thus, Colt would achieve its revenue target of CZK23–24.5bn and its EBITDA target of CZK4.5–4.8bn.