Czech c-bank expectedly keeps rates at record-low, koruna lid to stay in place until 2016

By bne IntelliNews August 1, 2014

The Czech central bank decided on July 31 to hold interest rates at record-low levels in line with analysts’ expectations and said it will extend its weak-koruna regime until 2016 as inflation continues to undershoot its outlook.

The bank reiterated its commitment to prevent the koruna from strengthening beyond 27 per euro. That commitment was one-sided, meaning the koruna can float freely on the weak side of the level. The board would have to find a further noticeable increase in anti-inflationary factors before moving the exchange rate commitment to a weaker level, the bank said.

The bank’s board voted to keep the main two-week repo rate at 0.05% for the 14th straight meeting after cutting it down by 20 basis points in November 2012. The Lombard rate that provides a ceiling for short-term interest rates on the money market was left at 0.25% and the discount rate that represents the floor for short-term money market interest rates was kept at 0.05%.

The bank surprised the market in early November 2013 when it launched the first in more than a decade koruna sales to weaken the currency and bring inflation back to its target. The bank spent over EUR 7bn in its November intervention saying the move was needed to stave off the threat of deflation and support the economy that is recovering from a record-long recession. The bank plans a change in its policy once the domestic price environment secures the economy far from the threat of deflation. The Czech currency has weakened more than 6% against the euro since the November interventions.

The weak-koruna regime targets to fuel inflation and stimulate growth by increasing the competitiveness of the country’s exports. Since the start of koruna sales, the Czech economic activity strengthened with the GDP posting its fourth quarterly rise in Q1 supported by higher demand both at home and from abroad. The currency-targeting regime has helped the economy avert the threat of deflation but consumer prices continue to post very weak annual growth rates. According to the latest data from the statistics office, inflation fell to zero in June, below the central bank’s 0.5% forecast. 

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