• Abrupt scrapping of koruna cap would be `irresponsible'
  • Timing of cap exit absolutely key for Czech National Bank

Czech policy makers stepped up warnings against bets on an early end to their monetary stimulus, saying the central bank may extend the regime of capping koruna gains if disinflationary risks increase.

The Czech National Bank won’t scrap the limit on currency appreciation, set at around 27 koruna per euro, until upward pressure on prices is strong enough to ensure monetary easing won’t be needed again in the following two to three quarters, Vice Governor Mojmir Hampl said at a conference in Vienna on Tuesday. Board member Jiri Rusnok reiterated the bank’s pledge to defend the limit until at least the second half of 2016 and said the exit can be delayed if needed.

“I don’t expect an abrupt exit from the intervention regime, because that would be totally irresponsible and devastating for the Czech economy,” Rusnok said in a video interview for Roklen24.cz posted on the central bank’s website on Tuesday. “The regime should be abandoned only when we feel very certain that we’re approaching the target” and “that we won’t have to reverse the move very soon and return to a similar policy.”

Inflation Below Central Bank's 2% Target
Inflation Below Central Bank's 2% Target

The comments strengthened recent signals from Governor Miroslav Singer and Vice Governor Vladimir Tomsik that the regulator may extend the stimulus as the fastest economic growth in eight years is failing to boost prices. While data published last week showed September annual inflation unexpectedly accelerating to 0.4 percent, it remains deep below the central bank’s 2 percent target.

The economic recovery and speculation that the central bank may scrap the limit earlier pushed the exchange rate toward 27 per euro in July and August, forcing the central bank to sell the koruna in the market for the first time since imposing the limit in November 2013. The Czech currency moved away from the intervention level in the second half of September, trading at 27.12 against the euro as of 1:26 p.m. in Prague.

“Many of those who weren’t convinced about our commitment and its stability and durability have now understood,” Rusnok said. “I don’t think there will be strong pressure to test the barrier.”

Rate setters in Prague won’t scrap the foreign-exchange limit before October next year, according to 12 of 19 economists surveyed by Bloomberg last month, including seven who expected the policy to be extended into 2017.

“It is a crucial question how to exit in a smooth way and the best way to do it smoothly is to do it in the best possible point in time,” Hampl said. “The timing is absolutely key in this.”

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