Euro-Area Risks Spark New Czech Warning to Weaken Koruna Further

  • Central bank discussed negative rates again at policy meeting
  • Bank sees exit from koruna cap regime as `likely' in mid-2017

The Czech central bank renewed warnings that it may weaken the koruna further if disinflation risks from the euro area and cheap commodities intensify and depress domestic wage growth.

The Czech National Bank reiterated on Thursday a commitment to prevent the koruna from gaining beyond a level it defines as “close to” 27 per euro. It deems an exit from that regime “likely” in mid-2017, Governor Miroslav Singer told reporters in Prague after the bank kept its benchmark interest rate at what it calls a “technical zero” of 0.05 percent.

Like many global counterparts, the Czech central bank is struggling to revive inflation as declines in food and energy costs outstrip the impact of recovering domestic demand. A prolonged period of subdued producer prices in the euro area is a significant risk to Czech inflation, according to Singer, who’s also looking at wage growth to determine whether a weaker koruna cap is needed.

“The risk of undesirable second-round effects of foreign cost factors is rising” as the low-inflation environment persists, Singer said. A potential shift in the currency limit wasn’t discussed at length because domestic inflation expectations don’t call for such action, he said.

Policy makers continued to debate negative interest rates on Thursday, Singer said, without elaborating. While he and some of his colleagues have said negative rates wouldn’t be efficient to quicken consumer-price growth, they see them as a possible measure to deter unwanted inflows to the koruna.

The currency has moved in a narrow range for almost five months, trading little changed at 27.032 against the euro as of 4:03 p.m. in the Czech capital.

The bank cut its 2016 economic-growth forecast to 2.3 percent from 2.7 percent, increasing next year’s projection to 3.4 percent from 3 percent. Its quarterly economic-outlook update also reaffirmed a prediction inflation will reach 2.2 percent in the third quarter of 2017.

The monetary authority has repeatedly intervened to prevent koruna appreciation, buying the equivalent of 623 million euros ($712 million) in February, down from 2.2 billion euros the previous month. It will publish March data Friday. Koruna interventions probably fell in March and April, suggesting additional measures aren’t needed to defend the currency limit, said Jakub Seidler, chief economist at the Czech unit of ING Groep NV.

“Today’s threat of weakening the koruna further can be understood as another verbal intervention and a signal the bank is ready to act,” Seidler said in a note. “It shouldn’t be taken too seriously given favorable job-market developments and declining unemployment.”

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