Czech Republic: Staff Concluding Statement of the 2026 Article IV Mission
IMF News, February 3, 2026
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- Published: February 3, 2026
Recent Developments
- The Czech economy expanded in 2025, driven primarily by domestic demand; growth was robust, averaging an estimated 2.5 percent.
- Real wages continued to recover from their post-pandemic decline, supporting household consumption.
- Public investment strengthened on the back of sustained absorption of EU funds; private investment and export growth moderated amid heightened global policy uncertainty and rising trade barriers.
- Headline inflation at year-end stood at 2.1 percent, broadly in line with the CNB’s inflation target.
- Core inflation edged up to 2.8 percent, driven by persistently elevated services price growth, including housing-related costs.
- Sustained nominal wage growth, around 7 percent, continues to exert upward pressure on services prices.
Outlook and Risks
- Growth projection: GDP is expected to expand at a similar pace in 2026, closing the output gap; medium-term growth is projected to slow toward its estimated potential of 1.8 percent.
- Inflation projection: Staff project headline inflation to fall below 2 percent this year; core inflation is expected to decline more gradually due to persistent wage growth and housing-related cost pressures.
- Risk assessment:
- Near-term risks to both growth and inflation are skewed to the upside.
- Medium-term risks are tilted to the downside.
- A shift toward more expansionary fiscal policy could temporarily raise growth above potential, fuel services and property price inflation, and trigger higher wage claims.
- Persistent global policy uncertainty, trade disputes, or a correction in global asset valuations could dampen growth and increase inflation volatility.
Fiscal Policy — Balancing Social Priorities with Fiscal Sustainability
- 2026 budget stance:
- The 2026 budget implies a moderately expansionary fiscal stance, with higher spending on social benefits and transport infrastructure.
- The general government deficit is projected to widen to 2.3 percent of GDP in 2026, compared with an estimated 2 percent in 2025.
- Medium- and long-term fiscal risks:
- Aging-related expenditures and sizable investment needs to strengthen energy security will weigh increasingly on the fiscal position.
- Absent consolidation, the public debt ratio would approach 60 percent by 2034, with gross financing needs rising persistently.
- Staff fiscal recommendations and quantitative targets:
- Recommend an annual fiscal adjustment of 0.5 percentage points during 2027-30 to converge toward a sustained structural deficit of 1 percent of GDP, which would stabilize the debt ratio below 50 percent by 2030.
- Maintaining the deficit at this level through 2040 amid mounting expenditure pressures would require additional measures of roughly 1.5 percent of GDP, bringing total consolidation needs to around 3.5 percent of GDP.
- Delays in initiating consolidation would further increase the required adjustment.
- Social policy guidance:
- Assess carefully the implications of capping the retirement age and modifying pension indexation parameters.
- Contain growth in the public sector wage bill, including at the local government level.
- Strengthen means-testing to improve targeting of social benefits.
- Explore efficiency gains through comprehensive spending reviews and reallocation toward more productive uses.
- Revenue and tax-structure notes:
- Social security contributions account for nearly half of total revenue.
- Property tax collection is 0.3 percent of GDP (compared to an OECD average of around 1.7 percent).
- Staff encourage transitioning to a value-based property tax system; part of additional revenue could be used by municipalities and directed toward social housing investment.
- Ongoing efforts to strengthen tax compliance (including reintroducing electronic registration of sales) should be complemented by further digitalization of tax processes.
Monetary Policy — Managing Risks through Scenario Analysis
- Current stance:
- Staff assess the current monetary policy stance as broadly appropriate.
- The current 3.5 percent policy rate lies within the range of neutral rate estimates.
- Monetary policy should remain on hold in the near term, unless incoming data, including wage developments or changes in fiscal policy, materially alter the inflation outlook.
- Analytical approach:
- Elevated domestic and global uncertainty underscores the importance of integrating scenario analysis more systematically into policy deliberations.
- Staff welcome the CNB’s review of its monetary policy analytical and modeling framework.
- The IMF’s Integrated Policy Framework offers a lens for assessing policy responses to shocks.
- Example applications:
- In the event of a correction in global asset valuations leading to currency depreciation, reserves could be used in combination with tighter monetary policy to mitigate inflationary pressures and output losses.
- A domestic fiscal expansion that contributes to macroeconomic imbalances should be countered exclusively with tighter monetary policy and strengthened communication.
- Central bank balance sheet:
- The CNB maintains an outsized balance sheet with reserves exceeding 300 percent of the IMF’s ARA metric.
- The CNB has been managing large excess koruna liquidity through standard repo operations, limiting reserve sales in a shallow FX market.
- Staff reiterate the case for considering a gradual balance sheet normalization through a transparent mechanism of preannounced, small, and regular FX sales, while leaving sizable reserves against future shocks.
Financial Policies — Calibrating Macroprudential Tools with Evolving Risks
- Current financial stability assessment:
- Financial stability risks remain contained but have risen amid real estate developments and elevated interconnectedness.
- Recovery in household real incomes is supporting repayment capacity; new mortgages are predominantly extended to high-income households.
- Banks’ lending standards remain prudent.
- Czech government securities are issued exclusively on the domestic market, increasing interconnectedness risks.
- Macroprudential recommendations:
- Recalibrate some instruments in the macroprudential toolkit as risks evolve.
- Support CNB recommendations to tighten loan-to-value and debt-to-income (DTI) limits for investment mortgages; continue close monitoring of the buy-to-let segment.
- If the share of investment mortgages in new lending continues to grow, consider additional measures, including regionally differentiated limits or reactivating DSTI and DTI limits more broadly.
- The countercyclical capital buffer (CCyB) is a less effective instrument for mortgage-specific risks; however, a further broad-based upswing in the financial cycle extending to corporate credit would warrant increasing the CCyB rate above the current 1.25 percent.
- Accessing the Eurobond market may help diversify the investor base of Czech sovereign securities and meet increasing FX funding needs related to defense and energy investments.
Structural Policies — Supporting Growth and Complementing Fiscal Consolidation
- Structural transition and priorities:
- The economy is gradually transitioning from a manufacturing-driven, export-oriented hub to a more mature and diversified economy, with ICT and financial services gaining importance.
- To boost potential growth and ease the burden of fiscal consolidation, advance structural reforms at the national level and deepen integration within the EU Single Market.
- Labor-market and skills policies:
- Strengthen workforce adaptability through active labor-market policies.
- The Flexi-Amendment to the Labor Code enhances flexibility by extending probationary periods, easing notice rules, and expanding parental leave options.
- Use data-driven forecasting to address sectoral skill shortages; modernize vocational training and public education.
- Streamline administrative procedures; expand childcare and eldercare to boost women’s participation; align training with future skill needs.
- Finance for innovation:
- Expand venture capital and equity financing to help start-ups scale up.
- The new government’s plan to introduce tax incentives for start-up investors is welcomed.
- Advance progress toward an EU-wide Savings and Investments Union.
- Energy security:
- Fiscal space should be preserved to support critical investments in energy security, including expanding nuclear power capacity.
- Limited viability of coal and slow adoption of renewables, with the lowest share in the EU at under 16 percent of electricity generation, leave the economy vulnerable.
- Emphasize deeper integration with the European electricity market, acceleration of transmission and distribution projects, and support for renewables through faster permitting and modern storage technologies.
- Housing affordability:
- Over the past decade, Czech house prices have been among the fastest rising in the EU, with average annual price growth remaining twice the EU average.
- Worsening affordability constrains labor mobility, limits access to high-productivity jobs, and reinforces wealth inequality.
- Address affordability with a comprehensive approach combining demand-side moderation and structural supply-side reforms.
- Priorities include targeted macroprudential measures (e.g., lower LTV and DTI limits for investment mortgages), streamlining and digitalizing permitting processes, and transitioning to a value-based property tax system.
Mission Note
- The authorities consented to the publication of this statement.
- The views expressed are those of the IMF staff and do not necessarily represent the views of the IMF’s Executive Board.
- Based on preliminary findings, staff will prepare a report that, subject to management approval, will be presented to the IMF Executive Board for discussion and decision.
- The mission thanks the Czech authorities for their warm hospitality, open collaboration, and fruitful discussions.
Czech Republic: Staff Concluding Statement of the 2026 Article IV Mission — February 3, 2026, International Monetary Fund