Draghi Seen Overshadowing Czech Attempts to Scrap Koruna Cap

Updated on
  • Crisis-era measure to endure until fourth quarter 2017: survey
  • Cautionary Swiss tale means Czech hands tied by ECB stimulus

The Czech Republic’s ambition to throw off its crisis-era currency regime is in danger of being delayed by Mario Draghi.

Ten of 18 economists surveyed by Bloomberg say the Czech National Bank will only be able to remove its three-year-old exchange-rate cap, which has kept the koruna from appreciating much beyond 27 per euro, in the fourth quarter of 2017 at the earliest. Yet policy makers in Prague said this month that they’re prepared to abandon it around the middle of next year, or possibly even January, as the economy improves.

The timing of the exit has become a debating point for central bankers in one of Europe’s fastest-growing economies. Going against the current of European Central Bank President Draghi’s unprecedented stimulus could trigger the sort of rapid gains Switzerland sparked in 2015 when it dropped its cap. Prices would deflate and make Czech exports from Skoda cars to Pilsner Urquell beer less competitive, the same risks the regime was designed to avert. 

“Dropping the cap before the ECB at least signals some tapering of its QE could trigger unnecessarily high appreciation pressure on the koruna, something Czech policy makers don’t want,” said Michal Brozka, chief investment officer at Raiffeisen Bank International AG’s unit in Prague.

To see the full survey results, click here.

Of the 18 economists surveyed, nine expect the cap to stay in place until the fourth quarter of 2017, and one expects it to linger until 2018. Only two analysts said the koruna will be allowed to float in the first half of next year.

Just five of those surveyed expect Czech officials to follow the Swiss in implementing negative interest rates to stem speculative flows into the koruna before scrapping the limit.

Returning the nation to a free-floating currency will be the biggest task faced by new CNB Governor Jiri Rusnok. Policy makers themselves admit that exiting the cap will be trickier than imposing it as they remember the turmoil that followed Switzerland’s move in January 2015. The Alpine nation was the first to limit gains against the euro and served as a model for the Czech Republic.

For a QuickTake on Czech monetary policy, click here.

“The CNB will not want to surprise markets and thus the timing will be made well in advance,” said Christopher Shiells, a London-based analyst at Informa Global Markets (Europe) Ltd. who sees an exit “later in the third quarter.”

The central bank intervened to weaken the koruna in November 2013 and then capped it at about 27 per euro after gains in the currency contributed to six straight quarters of economic contraction and the looming prospect of deflation. It has bought foreign currencies worth almost $25 billion defending the limit since it was introduced.

Now, central bankers expect to attain their goal of 2 percent inflation in the second quarter of next year, while 2015 economic growth of 4.5 percent was almost three times the euro-zone average. The CNB has pledged to maintain its koruna ceiling until the end of this year, but officials have intimated they’re likely to scrap it around the middle of 2017. 

They may find their best intentions superseded, said Radomir Jac, chief economist at Generali Investments CEE in Prague.

“The monetary policy stance of European major central banks is likely to remain relaxed and the Czech koruna may face pressure towards appreciation if the Czech National Bank makes the exit too early,” Jac said. “The exit will be difficult in 2017.”