The Czech National Bank (CNB) was forced to hike its activity on the currency market to maintain its cap on the koruna in December, data released on February 7 showed. Meanwhile, international reserves data for January suggest the central bank was forced to raise buying on the market to new heights in the first month of 2017.

The rise in intervention levels in December surprised analysts, who had predicted the CNB would spend far less than the CZK88bn (€3.2bn) reported. The figure brings the total spent in 2016 defending the currency against speculative capital flows betting the value of the koruna will jump when the regime is scrapped to CZK455bn. Around two thirds of that market activity was seen in the final four months of the year.

A sharp rise in inflation in late 2016 only raised bets that an early exit from the cap could be on the cards. A boost in the CPI to meet the central bank’s 2% target in the final month of 2016 produced a mini frenzy of speculative capital last month, suggesting the CNB was likely forced into robust intervention in January also.

Overall, around CZK900bn has been spent defending the cap since it was introduced in late 2013 in a bid to stimulate economic growth and stave off the deflation that has stalked the neighbourhood.

International reserves, published by the central bank a month ahead of intervention data, rose by CZK413bn in January, suggesting the CNB was forced to hike intervention massively as the December inflation data produced something of a CZKexit frenzy, with investors betting on an early removal of the cap.

Central bank officials appear to have talked the market down in recent weeks, insisting the regime will remain in place through at least the first quarter. The drop of the cap is now being penciled in for May-June by many.

The CNB continues to try to deflect the inflow of capital with suggestions it will not allow huge appreciation of the koruna even after the cap is removed. That has been the mantra for several months, and with foreign currency reserves now sitting at around CZK2.6tn, or 55% of GDP, it will clearly have the firepower and the motivation to use it. The sheer scale of investment positions eyeing the end of the cap also has some questioning whether the currency will actually retreat as they are unwound.

At the same time, the finance ministry recently announced a new record budget surplus, and the trade balance remained huge throughout 2016. Czech bond yields, in negative territory through last year, dropped to new lows in the last few weeks. That strongly suggests the pressure on the CNB will return as the removal of the cap approaches. The market will be closely watching as January CPI data is released on February 10.