Czechs Say ECB's QE No Hurdle to End Koruna Cap as Guidance Kept

  • Board reaffirms timing of probable cap exit at around end-2016
  • Czech monetary cycle `not synchronized' with ECB policy

Czech central bankers reaffirmed their outlook for maintaining a limit on koruna gains for about one more year even after their euro-area counterparts expanded monetary stimulus.

The Czech National Bank held its benchmark two-week interest rate at 0.05 percent for a 25th meeting on Wednesday, matching the forecasts of all 13 analysts in a Bloomberg survey. Governor Miroslav Singer reiterated a pledge to keep the currency cap, defined as “close to” 27 koruna per euro, in place at least until the second half of next year. The bank will probably exit the regime at around the end of 2016, he told reporters after the policy meeting in Prague.

The monetary authority is caught in a conundrum of domestic demand driving one of the fastest economic expansions in the European Union and declining commodity prices that pushed inflation back to near zero. While the European Central Bank’s quantitative easing is channeling more capital into Czech assets, rate setters in Prague don’t need to wait until the euro-area’s monetary stimulus ends to exit the currency cap, according to Singer.

“Our monetary cycle is not synchronized with the ECB,” he said. “It’s easily possible we’ll exit before them. Which doesn’t rule out subsequent interventions against sharp exchange-rate moves without a currency commitment.”

The meeting came a week after the ECB cut one of its main rates to a record low and expanded its asset-purchase program to at least 1.5 trillion euros ($1.6 trillion) to shore up the currency union’s muted economic recovery and bring inflation closer to 2 percent.

The Czech annual inflation rate fell to a nine-month low of 0.1 percent in November, mainly because of cheaper food and lower energy costs. The central bank sees inflation at 2.2 percent at the end of its forecast horizon in the first quarter of 2017.

The economic recovery and speculation that policy makers may scrap the limit earlier than planned pushed the exchange rate toward 27 against the euro in July and August, forcing the central bank to sell koruna in the market for the first time since it imposed the cap in November 2013. The currency has hovered near the intervention level in the past month, trading little changed at 27.03 against the euro at 4:32 p.m. in Prague.

The central bank, whose latest data showed no interventions were conducted in October, probably sold the national currency again in November and December in line with its foreign-exchange commitment, according to Jakub Seidler, chief economist at ING Groep NV’s unit in Prague.

The bank board sees risks to its price growth outlook as “broadly balanced” on the monetary policy horizon of 12 to 18 months, Singer said. The forecast envisages a “sustainable fulfillment” of the 2 percent target -- a condition for a return to conventional policy tools -- from early 2017.

Latest data indicate “robust” growth in gross domestic product in the fourth quarter, Singer said. While the declining cost of oil is a “positive supply shock” for the economy, the need to maintain “significantly expansionary monetary conditions” still persists, he said.

“We had thought that the council might strike an even more dovish line given the latest inflation data and fresh fall in oil prices,” William Jackson, senior emerging markets economist at Capital Economics, said in a note. “Nonetheless, it seems that the council isn’t too concerned by the softening inflation outlook.”

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