Czechs Stress Currency Cap to Stay as Inflation Stuck Below Goal

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Czech policy makers held interest rates near zero and kept a cap on currency gains, vowing to maintain the policy mix for at least another year because it sees inflation staying below target for longer.

The Czech National Bank held its benchmark rate at 0.05 percent for a 22nd meeting at a meeting in Prague on Thursday, matching the forecasts of all 14 analysts in a Bloomberg survey. The bank cut its 2016 inflation forecasts and “emphasized” its koruna regime will stay in place. The currency will be “at a level of 27 to the euro or weaker at least until mid-2016,” Governor Miroslav Singer said.

The central bank was forced to intervene in July to fend off appreciation pressure on the koruna as rising domestic demand and improving exports fuel an economic expansion. While gross domestic product will grow faster this year than policy makers forecast three months ago, inflation won’t return to the bank’s 2 percent target in the next 12 to 18 months.

“A sustainable fulfillment of this target, which is a condition for a return to conventional monetary policy, will not occur until early 2017,” Singer said, referring to the bank’s new forecast. “The need to maintain significantly expansionary monetary conditions therefore persists.”

The koruna was little changed at 27.027 against the euro at 3:54 p.m. in Prague. The currency has gained 2.3 percent against the euro since the start of the year.

Currency Interventions

Singer declined to say how often and in what volumes the central bank intervened since it returned to the market on July 17. The policy-making board didn’t have “a serious” discussion about potentially introducing negative interest rates at Thursday’s meeting, he said.

In a slight change of language in the foreign-exchange commitment, the bank said it won’t allow the koruna to appreciate to levels that “would no longer be possible to interpret as ‘close to CZK 27/EUR.’” Its previous statements specified the cap as preventing the koruna from “excessive” gains beyond 27 per euro.

The central bank cut the inflation forecast to 1.6 percent for the third quarter of 2016, from 2 percent, and sees price growth at 1.8 percent in the last three months of next year. It raised the GDP outlook to 3.8 percent for 2015, from the previous projection of 2.6 percent.

In comments on recent koruna gains, Singer said currency appreciation was pushing the horizon for reaching the inflation target further into the future.

“The emphasis on the impact of the strengthening currency seems, more than anything, to be a warning to the markets that the CNB is keeping a close eye on the koruna’s rise,” William Jackson, a senior emerging-market economist at Capital Economics in London, said in a note.

The bank sent the “strongest hint yet that the Council is likely to keep monetary conditions in their extremely loose state beyond next year,” Jackson said.

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