Czech Inflation Quickens as Rate Setters Mull Koruna Cap End

  • Central bank says data backs guidance for cap exit in mid-2017
  • Komercni Banka sees faster inflation boosting koruna demand

Czech August inflation accelerated in line with the central bank’s expectations as policy makers began voicing their preferences on how to scrap the three-year-old regime capping koruna gains next year.

Consumer prices increased 0.6 percent from a year earlier after rising 0.5 percent in July, the Czech Statistics Office in Prague said on Friday. The reading was below the 0.7 percent median estimate of 13 analysts in a Bloomberg survey. Prices declined 0.2 percent from the previous month, compared with a median estimate of a 0.1 percent drop.

The Czech monetary authority has yet to determine how to end its unconventional stimulus, which echoes efforts by its global counterparts to boost inflation, but several rate setters said this week the guidance of scrapping the koruna limit at around the middle of next year was realistic. Governor Jiri Rusnok and board member Vojtech Benda said they prefer a one-time exit rather than gradual steps.

“The Czech National Bank will certainly welcome this development because inflation is finally moving away from zero and beginning to approach the 2 percent target,” said Marek Drimal, an analyst at Komercni Banka AS in Prague, who still expects the currency cap to be removed near the end of 2017. “Today’s data will lead to continued pressure on the central bank’s exchange-rate commitment.”

The koruna remained steady just above the intervention threshold of 27 per euro this week and government bonds with shorter maturities jumped as mainly foreign buyers piled in, attracted by the prospect of future appreciation of the Czech currency. The yield on two-year sovereign notes fell 31 basis points in the past five days to a record-low of minus 0.62 percent as of 12:55 p.m. on Friday.

The central bank bought an equivalent 307 million euros ($346 million) in July, which was the smallest amount in four months, but ING Groep NV’s unit in Prague estimates that the intervention volume rose to about 1.1 billion euros in August.

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Sustainable fulfillment of the inflation goal after the return to standard monetary policy is a condition for scrapping the koruna limit, Rusnok said in an interview with Respekt magazine published on Monday. The governor said he “can imagine” leaving the koruna cap even when inflation is slightly below the target in the middle of 2017 if the central bank’s forecast shows price growth exceeding the goal in the near future.

One of the two deputy governors, Mojmir Hampl, said his view was “more conservative” and that he wanted to see inflation at least at the 2 percent target for the bank to return to standard monetary policy, Reuters news service reported on Thursday.

August headline inflation and its structure was in line with the central bank’s expectations, it said on Friday. The figures confirm “the message of the existing CNB forecast, which assumes that the exchange rate will be used as a monetary policy instrument until mid-2017,” the bank’s chief economist Tomas Holub said a statement.

The central bank is watching wage developments as a signal of future household consumption that should drive shop prices higher. The Social Democrat-led government, which has enjoyed record budget surpluses this year, is engaged in a push to raise salaries of public sector workers and supports trade unions’ calls for wage hikes in private companies.

Tomas Nidetzky, who joined the central bank’s monetary panel in July, said last month that current wages are hindering the economy and that salaries “need to rise more significantly.”

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