Czech Koruna Cap End Won’t Spur Steep Gains, Central Banker Says

Economic convergence with wealthier European nations will drive only moderate appreciation in the Czech currency after the central bank removes its cap on the exchange rate, Governor Jiri Rusnok said.

Assuming annual economic expansion of 3 percent in the Czech Republic and 1.5 percent in the euro area, the koruna has the potential for “real appreciation” of 1 percent to 2 percent a year over the long term, Rusnok told a conference in Prague on Monday. He reiterated that policy makers are likely to scrap the three-year-old limit, set at about 27 against the euro, in around the middle of next year.

“If our economy maintains its positive trend and keeps converging with the most developed euro-zone economies, then there is some room for long-term strengthening of the koruna,” the governor said. “But that room isn’t very big.”

As the Czech National Bank prepares to dismantle the intervention regime that has helped the economy avoid deflation and outpace most European peers, Rusnok is trying to manage investor expectations of future exchange-rate moves. Policy makers have repeatedly said they are ready to step into the market again even after the formal cap ends to stop any unjustified appreciation that could threaten the central bank’s 2 percent inflation goal.

The comments come two weeks after Rusnok quashed speculation that the central bank may push the cap exit forward, saying it’s more likely to happen after 2017 summer holidays and could be delayed further if needed to meet the inflation goal. Currency forwards used to bet on the euro-koruna exchange rate 12 months from now were little changed at 26.82 per euro as of 1:18 p.m., after touching a one-year intraday low of 26.58 on Sept. 9.

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