Czech Koruna Weakens as Tomsik Sees ‘Strong’ Deflation Pressures

The Czech koruna headed for its biggest drop in more than a year as central bank Vice-Governor Vladimir Tomsik warned against “strong deflationary pressures,” adding to speculation the regulator may ease monetary policy further.

The currency depreciated 0.8 percent to 27.875 per euro after euro-area data showed consumer prices fell more than analysts expected in December. A close at that level would represent the koruna’s biggest daily loss since November 2013 and compared with gains for the Polish zloty today.

Falling euro-area prices are a risk for the Czech National Bank’s efforts to lift the inflation rate toward its 2 percent target and for the country’s economy, Tomsik wrote in an opinion column in Hospodarske Noviny newspaper today. With the main interest rate at what the bank calls a “technical zero” of 0.05 percent, policy makers weakened the koruna in November 2013 and set a cap on gains at around 27 per euro to avert deflation.

“We keep importing strong deflationary pressures” that will intensify if the euro region’s “falling producer prices drag down the fragile growth in foreign demand,” Tomsik wrote. “That may have a negative impact on domestic real demand and the CNB will be again facing a decision on how to meet its inflation target, stabilize inflationary expectations and support the domestic real economy.”

Tomsik’s comments prompted Ceska Sporitelna AS to recommend investors sell the koruna on expectations it will weaken toward or beyond 28 per euro. The Prague-based unit of Erste Group Bank AG said in a report today there is a 30 percent risk that the central bank will shift the currency cap to 29-30 per euro.

‘More Dovish’

“We expect that inflation will remain below the target even in 2016,” David Navratil, Ceska Sporitelna’s chief economist, said in the note. “We expect the CNB’s exit to only start in 2017 and to be gradual.”

Euro-area consumer prices fell 0.2 percent in December from a year earlier, the first contraction in more than five years, the Eurostat office said today. Czech data due on Jan. 9 will probably show that annual inflation slowed to 0.2 percent last month from 0.6 percent in November, according to the median estimate of 11 analysts surveyed by Bloomberg.

Czech rate setters found the limit on koruna gains appropriate at a Dec. 17 policy meeting and reiterated a pledge to keep it in place until at least 2016. Governor Miroslav Singer said the same day he “can imagine” maintaining the cap for even longer.

“The CNB is clearly getting more dovish,” Brian Mangwiro, a London-based strategist at Royal Bank of Scotland Group Plc, wrote in a report today. “A shift on euro-koruna floor higher is not imminent, but the probability of such a move is rising.”

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