The Czech National Bank (CNB) is likely to raise interest rates next Wednesday. This follows on from statements made by the bank board, indicating that five of the seven board members voted for a rate hike in June. According to the central bankers, inflation remaining above the two-percent target for more than two years is the main reason for early policy tightening. They especially mention a possible adverse impact on inflation expectations. A 25bp increase in June should therefore signal that the CNB is ready to fight higher inflation. However, we do not expect the repo rate to move above 1% at the end 2021.

Contrary to expectations, inflation slowed in May and returned to the CNB forecast in year-on-year terms. The main reason for the slowdown in inflation was the fall in food prices. On the other hand, prices of services rose after the easing of anti-epidemic measures, and core inflation accelerated slightly month-on-month. Despite slower headline inflation, speculations about an early increase in CNB interest rates are unlikely to fall significantly.