The Czech Central Bank's Delicate Dance: Can Rate Cuts Outpace Tariff Headwinds?

The Czech Republic’s economy has long been a bright spot in Central and Eastern Europe, buoyed by strong manufacturing and resilient growth. Yet, as the U.S. tariffs on European steel and aluminum linger, a new question has emerged: Can the Czech National Bank (CNB) deliver the aggressive rate cuts predicted by Moneta Bank CEO Jakub Seget, or will caution prevail?

The answer hinges on a precarious balancing act between inflation risks, geopolitical uncertainty, and the CNB’s longstanding hawkish reputation.

The CNB’s Tightrope Walk

In March 2025, the CNB held its policy rate steady at 3.75%, signaling a shift from its earlier easing cycle. While Moneta’s Seget argues that “radical cuts” are now “highly plausible,” analysts caution that the CNB’s hands remain tied by stubborn inflation and fiscal discipline.

The Czech Ministry of Finance estimates that U.S. tariffs could shave 0.6–0.7 percentage points off 2025 GDP growth, a blow to an economy already grappling with global demand shocks. Yet inflation, at 2.8% year-on-year, remains above the CNB’s 2% target, driven by resilient wage growth and service-sector prices.

The Case for Caution

The CNB’s March decision reflects its dual mandate: stabilize prices while supporting growth. Board member Jiří Frait recently emphasized that “premature easing risks reigniting inflation,” a stance backed by Capital Economics, which now forecasts only one 25-basis-point cut by year-end—down from earlier predictions of a full percentage point reduction.

Even the European Central Bank’s (ECB) April rate cut to 2.25%—a nod to tariff-driven uncertainty—hasn’t forced the CNB to follow suit. The ECB’s “data-dependent” approach highlights the broader challenge: no central bank can afford to ignore geopolitical risks, but none can afford to overreact either.

Why the CNB Might Still Cut

The koruna’s strength, bolstered by the CNB’s higher rates compared to the ECB, has acted as a natural inflation brake. A weaker euro (EUR/CZK forecasted to dip to 24.80 by year-end) could ease export pressures, giving the CNB room to maneuver.

ING’s analysis suggests the CNB could trim rates to 3.50% by mid-2025, citing the koruna’s resilience and the ECB’s accommodative stance as tailwinds. However, this hinges on inflation cooling further—a big “if,” given Czech households’ robust spending.

The Moneta CEO’s Argument—and the Risks

Seget’s prediction of “radical” cuts likely assumes a worst-case scenario: a full-blown trade war with the U.S., triggering a sharper-than-expected slowdown. While such a scenario would force the CNB to act, it’s far from certain. The Czech Republic’s limited exposure to U.S. tariffs (just 6% of exports) tempers the immediate threat.

The bigger risk? Overestimating the CNB’s willingness to deviate from its inflation anchor. As one analyst noted, “The CNB’s credibility is built on price stability. They won’t jeopardize that for a temporary growth spurt.”

Conclusion: A Modest Cut, but No Revolution

The CNB is unlikely to deliver the “radical” rate cuts Moneta’s CEO envisions. While a 25-basis-point reduction by year-end remains possible—most likely in May or June—the bank will proceed cautiously.

Key data points reinforce this view:
- Inflation: Core inflation (excluding energy and food) remains elevated at 3.1%, limiting easing room.
- Growth: Even with tariffs, Czech GDP is expected to grow 1.8% in 2025, a pace manageable without aggressive stimulus.
- Global Context: The ECB’s “insurance cut” in April suggests a preference for gradualism, a template the CNB is likely to mirror.

Investors betting on radical rate cuts may find themselves disappointed. The CNB’s path will be measured, not revolutionary—a reflection of its dual mandate and the fragile equilibrium between growth and inflation. For now, the koruna’s strength and fiscal discipline are the Czech economy’s best defenses—and the CNB’s best arguments for patience.