Czech rate setters suggest koruna cap could be extended

By bne IntelliNews November 5, 2015

The Czech National Bank (CNB) again offered no surprises at its monetary meeting on November 5, keeping rates at effective zero and reaffirming its commitment to defend the koruna cap at CZK27 to the euro.

In the accompanying statement, the bank pushed its long-term dovish tone once more, saying the exchange rate ceiling will “probably” remain in place for longer than initially thought. The central bank has been busy in recent months fighting the markets and politicians, who have been testing its resolve to maintain the cap.

“The CNB board discussed extending the duration of the exchange rate commitment. It agreed that its discontinuation would probably shift to around the end of 2016”, the statement read. The CNB had previously committed to keeping the weak koruna regime through the first half of 2016, although many have been expecting it to extend the cap due to continued weak inflation and to ward off investors, who have been testing the limit.

The currency regime became the central bank’s primary policy tool after it slashed its main two-week repo to effectively zero in 2013. At the November 5 meeting, the bank’s board voted to keep the two-week repo rate at 0.05% for the 24th straight meeting. The discount rate was left at 0.05% and the Lombard rate at 0.25%.

The CNB has stated that inflation returning to the 2% target is “a condition for a return to conventional monetary policy”. According to the bank’s latest quarterly forecast, also released on November 5, inflation is seen rising towards the target in the first quarter of 2017, when it is forecast at 2.2%. That represents an improvement from the bank’s previous forecast, published in August, when CPI in Q1 2017 was forecast at 2.1%.

The bank also raised its GDP growth forecasts, saying that it now expects economic expansion of 4.7% for this year, compared to the 3.8% it expected three months ago.

Analysts at Capital Economics note that the strength of the economic data so far this year seems to have made the bank slightly more optimistic about meeting its inflation target. The rate setters also commented that the risks to the forecast were “broadly balanced”, compared with “anti-inflationary” at the previous monetary policy meeting in September.

“Even so, we remain of the view that monetary conditions will remain extremely accommodative until 2017”, the analysts add. 

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