"In terms of underlying inflation, a prolonged economic recovery is likely to cause disinflationary effects to be persistent. In addition to the moderate external inflation environment, weak domestic demand also points to a slowdown in price growth," the central bank's rate-setting Monetary Council said, outlining the main findings of the report.

"The time profile of the pandemic and the expected economic recovery may continue to result in volatile pricing patterns; therefore, an exceptionally cautious approach is warranted in assessing more persistent inflationary effects," the policymakers added.

The inflation rate is expected to rise to "around 4%", temporarily, in the spring of 2021 as excise tax rises on tobacco products come into effect, but fall later, according to the report. MNB puts CPI at 3.5%-3.6% for 2021, with the tobacco excise tax increase contributing 0.4 percentage points to headline inflation.

MNB projects core inflation excluding indirect tax effects – a bellwether indicator of underlying inflation – will fall to 2.8%-3% in 2021 from 3.7% in 2020.

The increase in unprocessed food prices is set to slow to 4.7% in 2021 from 11.8% in 2020, while fuel and market energy prices climb 4.1% after declining by 4.7% in 2020.

MNB sees CPI falling to 2.9%-3% – around the central bank's 3% mid-term "price stability" target – in 2022, as core inflation excluding indirect tax effects drops to 2.7%-2.8%.