Czech National Bank clouds message on potential effect of further ECB easing on koruna cap

By bne IntelliNews November 23, 2016

The Czech National Bank cares more about inflation than the monetary policy of the European Central Bank, as it mulls its options on removing the cap on the koruna, the governor of the CNB said on November 23.

Governor Jiri Rusnok spoke ahead of an ECB meeting next month at which many expect the Eurozone central bank will extend its bond-buying programme. Speculative capital has been pouring into Czech bonds and the currency as it bets on a jump for the koruna when the CNB drops its suppression of the koruna at a minimum of CZK27 to the euro. The Czech regulator has sought to deter those flows, but Rusnok’s comments appear contrary to that effort.

"If inflation will be staunchly headed to the target, or above it, then [further monetary easing from the ECB] does not have to worry us too much," Rusnok said, according to Reuters. He added he would not draw any conclusions on ECB policy at the moment.

The CNB has said it will definitely not remove the cap, applied since late 2013, before the second quarter of 2017. The regulator says the regime is likely to be lifted in the middle of the year, as inflation is forecast to be heading towards its target of 2% at that point.

The CNB has sought to stem the speculative capital flows, but Rusnok’s dismissal of the potential effects of any ECB action appears at odds with that effort. At the monetary policy board’s November meeting, rate setters noted that an extension of the ECB’s quantitative easing programme is one of the biggest risks to the Czech economy.

Uncertainty surrounding the return of Eurozone inflation to its target is another worry that was discussed in Prague. Both issues could clearly delay any removal of the cap.

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