Koruna-Cap Exit on Track as Czechs See Inflation on Goal Sooner

  • Policy board holds rates at ‘technical zero,’ keeps koruna cap
  • Rate setters shelve discussion on negative interest rates

The Czech Republic’s newly revamped rate-setting board shelved a debate over negative interest rates as fresh economic projections forecast price growth may reach its target sooner for the first time in two years.

In an inaugural decision under new Governor Jiri Rusnok, the Czech National Bank left its benchmark rate at what it calls a “technical zero” of 0.05 percent and kept a limit on the currency at around 27 per euro on Thursday. The board reiterated its plan to return the koruna to a float in around the middle of 2017.

While the policy remained unchanged, as it has since the koruna cap was imposed in 2013, the bank also released new inflation estimates that advanced the projected date price growth will hit the bank’s target. With the country of 10.5 million now boasting the European Union’s lowest unemployment rate and one of the fastest-expanding economies, the bank now sees inflation hitting its 2 percent goal in the second quarter of next year, compared with a previous forecast for the third quarter.

“We don’t need further significant steps toward more relaxed conditions to reach the target,” Rusnok told a news conference in Prague after the policy decision. “We didn’t discuss negative rates at all today. My explanation for this is that the forecasts sound pretty comfortable and problem-free to us.”

The only Czech to ever hold the positions of prime minister, finance minister and central bank governor, Rusnok is now facing the task of dismantling a Switzerland-inspired exchange-rate regime while avoiding the kind of currency jump that followed that country’s decision to remove the franc cap last year.

That may be expedited by rising wages and some commodity prices may, whose impact have been a major factor in moribund price growth, with inflation hovering at just 0.1 percent in June, Rusnok said. He reiterated that while the U.K. vote to leave the EU was creating some uncertainty, it’s difficult to predict its long-term effects on the Czech economy.

The koruna has been stuck in a narrow range near the intervention level as Czech exporters repatriate revenue and some foreign investors pile in expectation of a payoff when the cap is lifted. The currency traded at 27.03 at 4:13 p.m.

Rusnok, promoted from board member by President Milos Zeman, was also joined on the board by Vojtech Benda and Tomas Nidetzky, who had worked with the new governor in the past. The new members may make the seven-strong panel more willing to abandon the currency cap, according to Jakub Seidler, chief economist at ING Groep NV’s unit in Prague.

“In its original composition, the board would have very likely extended the commitment until the end of 2017 because of higher risks abroad,” he said by e-mail. “But the new leadership will be more cautious about prolonging the weak-koruna policy, adopting more of a wait-and-see approach that would leave them with more maneuvering room.”

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