The Czech National Bank (CNB) offered no surprises at its monetary meeting on May 5, as it held interest rates and reaffirmed its commitment to defend the koruna cap at CZK27 to the euro. However, the Monetary Policy Council warned it foresees greater anti-inflationary risks, and raised the dovish tone by suggesting it could look to weaken the koruna further.

The board’s unanimous decision to keep interest rates on hold and confirmation that it expects to extend the cap to mid-2017 was thoroughly expected. However, the new prognosis of increased downside inflationary pressure – and a comment from Governor Miroslav Singer of the possibility of further efforts to weaken the koruna in response to deflationary pressures from the Eurozone – created a stir.

A line into the accompanying press release said that the MPC “stands ready to move the exchange rate ceiling to a weaker level if there were to be a systematic decrease in inflation expectations” that affects variables such as wages.

“According to the new forecast, inflation will decline temporarily close to zero in the near future, mainly due to cost-push effects from abroad. However, it will then increase, hitting the 2% target at the monetary policy horizon,” the statement added.

The inflation forecast assumes GDP growth in the Eurozone will fluctuate at around 2%, while in the Czech Republic it slows to 2.3% this year from the exceptionally high level of 4.3% recorded in 2015. It also assumes that consumer price inflation will rise gradually from very low levels, but will again stay below 2% next year.

“Headline inflation will decline temporarily close to zero in the near future”, the CNB said, in large part due to “a deepening of the decline in food prices and a temporary slowdown in adjusted inflation”.

“The CNB sees a risk that inflation could temporarily fall back to zero in the first half of this year, mainly because of the negative impact of the Eurozone,” Ceska Sporitelna analyst Jiri Polansky said in a flash note. “According to the board, these negative influences will operate longer and stronger, which will then outweigh the positive inflationary development of domestic demand.”

Other analysts hinted that they believe talk of further weakening the currency may be little more than more attempts at verbal intervention.

“So long as the economy continues to hold up well, we think additional policy easing – probably via a weaker exchange rate ceiling, although possibly via the introduction of negative interest rates – is unlikely,” writes William Jackson at Capital Economics. “Our view is that GDP will grow by 3.0% this year and 3.5% in 2017, both of which are stronger than the national bank’s forecasts. Accordingly, we are sticking to our view that monetary conditions will remain in their current very loose setting for the foreseeable future.”

The central bank kept the two-week repo rate at 0.05%, the discount rate at 0.05% and the Lombard rate at 0.25%.