Czechs Keep Koruna Cap Exit Plan as Brexit Obscures Outlook

  • Governor Singer chairs last meeting before his term ends
  • Bank keeps guidance for ending currency limit in mid-2017

The Czech central bank stuck to its guidance for scrapping monetary stimulus and returning to conventional policy next year as rate setters began to assess the impact of the U.K.’s vote to the leave the European Union.

The Czech National Bank left its benchmark interest rate at what it calls a “technical zero” of 0.05 percent, where it’s been since 2012, matching the forecasts of all 15 economists in a Bloomberg survey. It also kept a limit on koruna gains, defined as “close to” 27 to the euro, and reaffirmed the board’s expectation that the Swiss-style currency cap will “likely” be removed in mid-2017.

Like its counterparts across the globe, the Czech central bank added the U.K. referendum to a list of uncertainties after the result of the vote roiled global markets and increased risks for European economies. While the regulator sees slightly disinflationary risks to its forecast stemming from low producer prices in the euro area, it’s difficult to predict the long-term effects of the Brexit on the Czech economy, according to Governor Miroslav Singer.

“The short-term impact is increased uncertainty, which isn’t helping investment activity and the sentiment of companies and consumers,” Singer told reporters in Prague Thursday, after overseeing his final policy meeting on the last day of his term. “The immediate impact here isn’t significant, but it’s an uncertainty that could cause more political uncertainties.”

The central bank is struggling to revive inflation as declines in food and energy costs outstrip the impact of recovering domestic demand. Price growth slowed to 0.1 percent in May from a year earlier, the lowest in five-months, from 0.6 percent a month earlier. The monetary authority’s latest forecast sees inflation returning to its 2 percent target in the third quarter of next year.

For the story on inflation trends, click here.

The central bank has repeatedly intervened to prevent koruna appreciation, buying the equivalent of 393 million euros ($437 million) in April. After moving in a narrow range for almost seven months, the koruna slid to its weakest level since November after the Brexit vote. It traded little changed at 27.097 against the euro as of 4:09 p.m. in the Czech capital.

The bank board repeated a warning that it may shift the koruna cap to a weaker level if it sees a “systemic” decline in inflation expectations hurting wage growth. At the same time, Singer said salary increases has accelerated to levels “slightly” exceeding the bank’s forecast.

“Despite all uncertainties about the global economic climate, including those related to Brexit, I still think we aren’t in a situation that would warrant weakening the level of the foreign-exchange commitment,” Radomir Jac, chief economist at Generali Investments CEE in Prague, said by e-mail.

With Singer’s departure, central bank efforts to steer the economic fall to a reshaped rate-setting panel. Board member Jiri Rusnok will take over as governor and two new policy members join the monetary council on Friday.

For the story on changes in central bank’s board, click here.

The bank will present a more detailed view about economic risks at the next policy meeting on Aug. 4, when it will also publish the quarterly update of its forecasts.

“The decision in August and the accompanying rhetoric will be quite important, because they could signal preferences of the new bank board and its willingness, or unwillingness, to further extend the foreign-exchange commitment,” said Jakub Seidler, the chief economist at the Czech unit of ING Groep NV.

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