Czechs Delay Koruna Cap Exit, Mull More Easing to Offset ECB

Updated on
  • Central bank won't scrap limit on koruna gains before 2017
  • Bank board discussed negative interest rates again on Thursday

The Czech central bank delayed the exit from its regime of limiting koruna gains until 2017 and returned to considering negative interest rates as a possible tool to help mitigate the impact euro-zone quantitative easing is having on the economy.

The Czech National Bank held its benchmark two-week interest rate at 0.05 percent for a 26th meeting on Thursday, matching the forecasts of all 17 analysts in a Bloomberg survey. The bank board ruled out scrapping the currency cap in 2016, compared with previous guidance that it would end at around end-year. It sees the exit from the regime as probable in the first half of 2017, Governor Miroslav Singer told reporters after the policy meeting.

The monetary authority is coping with opposing economic forces, as cheap commodity prices balance out the inflationary effects of an acceleration in economic growth fueled by domestic demand. While rate setters have said they don’t have to align the exit from the unconventional policy regime, which they introduced in 2013, with the end of the European Central Bank’s quantitative-easing program, developments in the the euro area are influencing policy deliberations in Prague.

“Our monetary conditions are de-facto becoming slightly tighter due to policy loosening by the ECB,” Singer said. “The interest-rate differential has been widening since the start of the year, which is prompting us to discuss a potential next step,” he said in reference to a debate about the possible introduction of negative rates in the Czech Republic.

Despite the discussion of potential further policy easing, the Czech koruna was unchanged after Singer’s comments, trading at 27.02 against the euro at 4:48 p.m. in Prague. The lack of weakening parallels developments on the euro, which climbed to more than a three-month high versus the dollar on Thursday as currency traders pay little heed to ECB President Mario Draghi’s signals that the bank may pursue more stimulus.

On Thursday, the head of the euro zone’s monetary authority said weak inflation around the globe won’t stop the ECB from adding stimulus to the currency area. Bank of England Governor Mark Carney also said on Thursday that inflationary pressures are fading fast, while the U.S. Federal Reserve has signaled it may put off a March rate hike and the Bank of Japan has introduced negative rates.

Euro Impact

The return to a discussion about bringing borrowing costs below zero underlines the importance of euro-area monetary conditions for the Czech central bank’s policy, according Radomir Jac, chief economist at Generali Investments CEE in Prague.

“From the perspective of financial markets, the speculation on negative interest rates is back in the game, but I think the central bank would have to face really strong speculative pressure on the koruna to indeed impose negative rates,” Jac said.

The Czech central bank has repeatedly bought foreign currencies in the market since July to prevent the koruna from gaining beyond around 27 against the euro. The Czech currency has appreciated 2.7 percent over the past 12 months, the best performance among currencies in post-communist Europe.

Dovish Mood

Annual inflation stayed at 0.1 percent in December, mainly because of cheaper food and lower energy costs. The central bank also published new inflation forecasts on Thursday, cutting the price growth prediction to 2 percent in the first quarter of 2017, from the previous estimate of 2.2 percent. It sees inflation at 2.1 at the end of its forecast horizon in the second quarter of next year.

Rate setter Jiri Rusnok, whom President Milos Zeman has chosen as his preferred candidate to replace Singer as governor when his term expires on July 1, has said the inflation forecast must show price growth clearly heading above the 2 percent target for the central bank to abandon the cap.

“It’s clear that policy makers are increasingly concerned about the weak inflation outlook and the impact of looser policy in the euro-zone,” William Jackson, senior emerging markets economist at Capital Economics, said in a note. “The national bank is clearly in a dovish mood. As things stand, we think the strength of the economy may prevent the council from pushing through looser monetary policy.”

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