The vice governor of the Czech National Bank (CNB) offered another verbal intervention on October 8, as he suggested the central bank could extend its cap on the koruna.
The CNB has shown it is serious about keeping its commitment to prevent the koruna from gaining above CZK27 against the euro and that it can keep the cap as long as necessary, Vice Governor Mojmir Hampl said in comments posted on the central bank's website. The CNB has been tussling with investors who are testing the regulator’s commitment to the policy for months.
“Probably due to the fact that after more than a year and a half of not only words but also concrete market activity, (the CNB) has clearly told the world that it is serious about its exchange rate commitment and holding it for a minimum period, at least until the second half of 2016, maybe even longer” Hampl said.
The CNB introduced its weak koruna policy in late 2013 and has since pledged to keep the cap in place until the end of 2016 at least. The country’s strong economic growth (GDP grew by 4.6% in the second quarter – the EU’s second fastest growth) paired with the koruna's status as a safe haven through the Greek crisis, has spurred investors to test the regulator’s limits.
That forced the central bank in July to intervene on the market for the first time since it introduced the policy. Data released on October 7 showed the CNB spent CZK3.7bn in the market in September.
Though the weak koruna policy has been successful in spurring economic growth, the CNB is also fighting political pressure. There have been calls for the central bank to scrap the policy, with President Milos Zeman leading the charge. He claims the cap “hurts most Czech citizens”.
Hampl defended it, calling it one of the main engines of growth and noting caustically that policy aims have a different “horizon than an election cycle”.
“Therefore it is worth recommending again, especially to market players, to pay more attention to inflation, CNB forecasts and its statements”, he said.
Weak inflation has analysts raising bets for a later exit from the policy. Consumer price inflation eased to a five-month low of 0.3% y/y in August, well behind the central bank’s 2% target. The current CNB forecast expects inflation will not reach the target until 2017.
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