Czechs Keep Currency Cap as Koruna Gains Offset GDP Growth

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The Czech central bank kept borrowing costs near zero and maintained a cap on koruna gains, saying a stronger currency is counterbalancing the inflationary effects of accelerating economic growth.

The Czech National Bank held its benchmark interest rate at 0.05 percent for a 21st meeting on Thursday, matching the forecasts of all 19 analysts in a Bloomberg survey. The bank board also reaffirmed its commitment to prevent the koruna from “excessive” gains beyond 27 to the euro, a limit it set in 2013.

The bank is assessing the effects of an economic recovery and this year’s currency appreciation on consumer prices. Rate setters see a decreasing chance that they’ll need to move the koruna limit to a weaker level and the bank board reiterated its plan to keep the current exchange-rate policy in place at least until the second half of next year.

“We were slightly positively surprised with the data that showed the state of the economy,” central bank Governor Miroslav Singer told reporters. “On the other hand, the koruna is a bit stronger than it used to be.”

Koruna Gains

The koruna has gained 1.5 percent to the euro this year, trimming its loss since the November 2013 market intervention to 5.4 percent. It traded little changed at 27.252 against the euro as of 4:01 p.m. in Prague.

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. “However, the probability of such developments has decreased” since the previous monetary-policy meeting held in May, Singer said.

The latest statistics on inflation, economic growth and average wages all exceeded the central bank’s forecasts, according to the governor. The “positive” data may push inflation up faster than the central bank forecasts, while koruna’s strengthening against the euro is an “anti-inflationary risk” to the bank’s prognosis, he said.

Chief Mandate

The central bank, whose chief mandate is to keep inflation within a band of 1 percent to 3 percent, still assumes that the price gauge will “merely approach” the 2 percent target in the third quarter of next year even in light of the new data, Singer said.

Inflation accelerated to an annual 0.7 percent in May, from 0.5 percent in the previous month. Gross domestic product grew 4.2 percent compared with a year earlier and gained 3.1 percent on a quarterly basis.

After the Czech currency’s appreciation closer to its cap level, “we were surprised that central bank practically didn’t make any effort to weaken the koruna with a verbal intervention,” Marek Drimal, an analyst at Komercni Banka AS in Prague, said in a note to clients.

“If the koruna strengthens again toward the limit of 27 against the euro in the coming days, policy makers may come with some statement aimed at pushing it away from that limit,” Drimal said.

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