Negative Rate Talk Accompanies Koruna Cap Drift Deeper Into 2017

  • Exit from koruna cap likely `nearer' middle of next year
  • Czech debate on sub-zero rates focused on potential impact

The Czech central bank moved guidance on the eventual exit from its regime capping koruna gains deeper into next year and policy makers extended their debate over whether or not cut to rates below zero if they need more monetary loosening.

The Czech National Bank kept its benchmark interest rate at 0.05 percent for a 27th meeting on Thursday, matching the forecasts of all 15 analysts in a Bloomberg survey. The board also reaffirmed its limit on koruna appreciation, defined as “close to” 27 against the euro. Governor Miroslav Singer said the board sees the likely exit from the currency-cap regime “nearer to mid-2017” due to “slightly anti-inflationary” risks to the bank’s forecast.

The board’s debate on negative rates was “maybe slightly longer” than at the February meeting, Singer told reporters in Prague. “In terms of details, I think that more than about a specific form, the debate was about the context of using interest rates, the context of what they can or cannot do in the economy.”

The Czechs are calibrating their response along with their Eastern European peers to increasing monetary stimulus in the euro area, the region’s biggest trading partner, after the European Central Bank and several other global monetary authorities embraced sub-zero rates to spur inflation. Romania kept its main rate unchanged on Thursday, while Hungary last week unexpectedly cut its benchmark and took the overnight deposit rate below zero for the first time.

Czech rate setters have long struggled to lift inflation even as economic growth of 4 percent in the fourth quarter was one of the fastest rates in the European Union. The central bank has repeatedly intervened in the market to prevent koruna appreciation and pledged not to exit their regime of limiting currency gains before 2017.

The koruna has moved in a narrow range on the weak side of the cap for almost five months, trading less than 0.1 percent stronger at 27.040 to the euro as of 3:50 p.m. in Prague.

Capital Inflows

While the bank board didn’t vote on a proposal for negative rates at its March meeting, inflation trends and policy loosening abroad may force it to bring the deposit rate slightly below zero to discourage capital inflows, according to Radomir Jac, the chief economist at Generali Investments CEE in Prague.

“If it does use negative rates, the CNB will certainly try to prevent this tool from affecting household deposits held by domestic banks,” Jac said in a note.

Jiri Rusnok, who has been picked to become the next governor when Miroslav Singer’s term ends at the end of June, signaled a similar approach before Thursday’s meeting, saying the regulator will probably use negative rates only if it needs another instrument to deter “excessive” appreciation pressure on the koruna.

“We can’t give up that tool, but at the same time I think the probability of it being used is really low,” Rusnok, who joined the national bank’s board two years ago, said on March 18. “And if it is used, it would be, to some extent, symbolic.”

Singer and Vice Governor Mojmir Hampl have warned of risks from sub-zero rates to domestic lenders, saying the existing cap on koruna gains is a better tool. Another board member, Lubomir Lizal, said the bank may impose negative interest rates to fend off unwanted capital inflows around the time it scraps the limit on the currency.

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