Czech Central Bank Keeps Koruna Lid on Euro-Area Outlook

The Czech central bank kept a Swiss-style currency cap for a seventh meeting as policy makers weighed accelerating inflation against risks stemming from economic weakness in the euro area.

The benchmark interest rate was kept at 0.05 percent for a 15th meeting, matching the estimates of all 18 analysts in a Bloomberg survey. Policy makers also reaffirmed their commitment to prevent the koruna from “excessive strengthening” beyond 27 per euro, a limit set on Nov. 7. Governor Miroslav Singer reiterated today the bank won’t scrap the cap before 2016.

While the Czech economy is recovering from a recession and inflation has picked up this year, policy makers in Prague are evaluating threats that price growth may undershoot their forecast. Apart from “subdued” inflation in the euro region, the “slightly anti-inflationary” risks for the Czech Republic include a dimming outlook for global oil and food costs, Singer said.

“The Czech economy is now in a period of relatively good growth, especially in the European context, and this doesn’t seem to be ending,” Singer told reporters. “Regarding the euro zone, we can expect to import de-facto deflationary pressures for some time, mainly in the producer prices.”


Weakening the koruna became the central bank’s primary policy tool after it cut the main rate to what it calls the “technical zero” in 2012. The unconventional policy easing echoes steps taken by global monetary authorities from the European Central Bank to the Bank of Japan.

The koruna traded little changed at 27.531 per euro as of 3:30 p.m. in Prague. It’s depreciated 6.3 percent against the euro since the November interventions, the fourth-biggest loss in that period among 24 emerging-market currencies tracked by Bloomberg.

The return to “conventional monetary policy” won’t lead to koruna gains to the pre-intervention level because the weaker exchange rate will have passed through to the economy by the time the central bank scraps the cap, Singer said, repeating statements made before today’s meeting.

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

Inflation Upswing

Consumer-price growth accelerated to 0.6 percent from a year earlier in August, compared with 0.5 percent in the previous month, with the strongest impact coming from higher costs of food, beverages and tobacco, the statistics office said.

The August inflation rate was the highest this year and exceeded the central bank’s forecast of 0.4 percent.

The economy has been rebounding since the currency interventions, showing annual growth in the three quarters through June after seven consecutive contractions.

While it’s “hard to predict” future developments in the standoff between Russia and Ukraine, the trade sanctions have so far had an insignificant impact on the Czech economy, according to Singer.

The economy of Germany, Europe’s largest and the main destination for Czech exports, contracted in the second quarter and euro-area growth stalled as geopolitical tensions and high unemployment sapped sentiment. The risks prompted the ECB this month to say it’ll be more active in adding stimulus to the euro area by starting asset purchases.

“Efficient monetary policy easing in the euro zone helps increase foreign demand for our producers, so it supports the steps we are taking here,” Singer said.

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