Czechs Commit to Koruna Cap for Longer as Risks Mount

The Czech central bank pledged to keep a Swiss-style currency ceiling until 2016 as the risks of slowing inflation outweigh a rebound from the longest recession on record.

The Czech National Bank yesterday reaffirmed its commitment to prevent the koruna from “excessive strengthening” beyond 27 per euro, a limit on the currency pair set Nov. 7. It also left the benchmark interest rate at what it calls a “technical zero” of 0.05 percent for a 14th meeting.

Governor Miroslav Singer is sounding the alarm over slowing inflation even as the economic recovery picks up speed after the central bank acted to weaken the koruna. While the bank raised its forecast for this year’s economic growth, it sees threats that developments in the Czech Republic’s main trading partners will damp price growth more than it expects, Singer said.

“We are seeing risks on two levels: first, the situation in the euro zone, which is also improving but remains still very fragile with the downward price development being rather dire,” Singer told reporters in Prague. “The other factor that may obviously have some impact on us is a further escalation in the tension between the European Union and Russia.”

Primary Tool

The koruna held steady at 27.664 per euro as of 9:16 a.m. in Prague after weakening 0.5 percent yesterday, its biggest intraday loss in seven months. It’s depreciated 6.4 percent against the euro since the November interventions, the fourth-biggest loss in that period among 24 emerging-market currencies tracked by Bloomberg.

Weakening the koruna became the central bank’s primary policy tool after it cut the benchmark to effectively zero in 2012. That followed unorthodox steps taken by global monetary authorities from the U.S. Federal Reserve to the Bank of Japan.

The Czech central bank, whose chief mandate is to keep inflation between 1 percent and 3 percent, said loosening the monetary screws helped avert the threat of deflation.

“The market is now likely to speculate that the CNB will raise the exchange-rate cap further should inflation and economic development continue to disappoint,” Thu Lan Nguyen, a Commerzbank AG strategist, said today by e-mail. “We stick to our base scenario that such a step won’t be taken as the hurdle for such a measure remains high.”

Inflation slowed to zero in June, below the central bank’s 0.5 percent forecast, from 0.4 percent the previous month.

‘Very Brief’

The central bank raised its forecast for 2014’s gross domestic product growth to 2.9 percent from 2.6 percent, while cutting its 2015 estimate to 3 percent from 3.3 percent. It sees inflation at 2 percent in the third quarter of next year, below a previous forecast of 2.2 percent.

The bank’s board had a “very brief” discussion about the possibility of shifting the koruna ceiling to a weaker level, Singer said. Such a move would require “a further notable strengthening of disinflation effects” he said.

Since the start of the intervention regime, the statistics office’s data have shown faster economic expansion and rising retail sales.

The debate about possibly shifting the koruna cap is “completely in place given the strengthening anti-inflationary risks in the Czech Republic and in all Europe,” Stanislava Pravdova, a Danske Bank AS analyst, said by e-mail. “Despite this, the CNB is still very far from acknowledging the need for more monetary easing and hence weakening the koruna more aggressively.”