Czechs Keep Koruna Cap as Disinflationary Risks Still Loom

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The Czech central bank kept borrowing costs near zero and maintained its cap on koruna gains as disinflationary risks prevailed even as policy makers became more optimistic about the benefits of euro-area monetary easing.

The Czech National Bank kept its benchmark interest rate at 0.05 percent for a 20th meeting on Thursday, matching the forecasts of all 18 analysts in a Bloomberg survey. Policy makers also reaffirmed the commitment to prevent the koruna from “excessive” gains beyond 27 to the euro, a limit set in 2013.

Rate setters are weighing the impact of an economic recovery and the possible effect of the European Central Bank’s quantitative easing on Czech price growth, which has hovered just above zero for months. The Czech regulator reiterated on Thursday its pledge to keep its lid on koruna gains at least until the second half of 2016 as the bank cut its inflation forecasts for next year.

Wage developments and the koruna exchange rate against the euro “have so far been moving in the anti-inflationary direction,” Governor Miroslav Singer told reporters. “By contrast, the optimism about the overall expected benefits of the measures adopted by the European Central Bank for developments in the euro area and in the Czech Republic is growing.”

‘Remains Ready’

The central bank reiterated that it “remains ready” to move the koruna cap in case of long-term deflation pressures that would cause a slump in domestic demand and hurt inflation expectations.

The central bank, whose chief mandate is to keep inflation between 1 percent and 3 percent, warned at its March meeting that it may weaken the lid on currency gains after the koruna strengthened closer to its limit and boosted dis inflationary risks.

The board “hasn’t debated” any changes to likelihood of shifting the cap to a weaker level on Thursday as the new prognosis differs only “slightly” from the previous one, Singer said.

The koruna was little changed at 27.421 to the euro as of 5:03 p.m. in Prague. It’s gained 0.9 percent against the euro this year. Weakening the koruna became the central bank’s main tool after it cut the benchmark rate to what it calls “technical zero” in 2012.

Economic Rebound

Inflation accelerated to 0.2 percent in March, from 0.1 percent the previous month. The economy expanded for five consecutive quarters through December, driven by household consumption and investment, after six annual contractions in a row.

The central bank cut its inflation forecasts for the second quarter of 2016 to 1.5 percent from 1.6 percent, according to the new prognosis published on Thursday. It also lowered its price growth estimate for the third quarter of 2016 to 2 percent from 2.1 percent.

The watchdog kept its gross domestic product forecast for 2015 at 2.6 percent and increased the projection for 2016 growth to 3.2 from 3 percent.

The central bank’s comments on Thursday were “dovish, but less so than in March,” William Jackson, a senior emerging-market economist at Capital Economics in London, said by e-mail. “As a result, while we expect monetary conditions to remain very loose, we think additional policy easing now looks unlikely.”

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