The month-on-month rise in consumer prices was twice as fast as expected in July. The year-on-year inflation rate reached 3.4%, which is 0.4pp above the CNB forecast, and is heading for 4%. Above all, the prices of services are rising. Concerns about rising inflation expectations will lead the CNB to further raise interest rates. Uncertainty about price developments in the near term remains elevated.

As expected, the central bank raised its key repo rate from 0.50% to 0.75% at its August meeting. Although the bank board discussed a 50bp hike, as proposed by the new CNB forecast, in the end it preferred a gradual normalisation of monetary policy. According to Governor Rusnok, the CNB should continue to pursue gradual normalisation for the rest of the year. While the CNB forecast calls for a repo rate of 1.50% at year-end, we expect 1.25% due to the cautious approach of central bankers. However, we already expect a repo rate of 2.25% for end-2022, while the CNB expects 2%. The difference is mainly our expectation of a stronger economic recovery, with a slightly weaker koruna.