Czech Central Bank Zeros In on Ending Koruna Cap in Mid-2017

  • Bank pledges to maintain koruna limit until at least April
  • Board members say policy change likely in middle of next year

The Czech central bank signaled stronger confidence about when it will scrap its limit on currency gains, as policy makers narrowed the expected window to return to conventional monetary policy in around the middle of next year.

The Czech National Bank kept the benchmark rate at the “technical zero” of 0.05 percent on Thursday and confirmed its cap on the koruna exchange rate at around 27 per euro. It also prolonged its formal pledge to prevent the currency from appreciating beyond that level by three months, until at least April. Governor Jiri Rusnok reaffirmed the board’s view that the exit from the currency regime was likely around mid-2017, and said there was a “minimal” risk of postponing the policy shift after several delays in the past three years.

“We now have much stronger certainty, as we are moving closer to the discussed horizon, that nothing extraordinary will happen in the meantime,” Rusnok told a news conference after the board meeting in Prague. “That’s why we decided to move the so-called hard commitment by one quarter.”

With the Czech Republic boasting one of Europe’s fastest-growing economies, rate setters are preparing to dismantle the Swiss-inspired currency regime while avoiding the kind of jump in the koruna that followed the decision in Switzerland to end the franc cap last year. Rusnok tried to quash speculation earlier this month that his board may push the exit forward from current guidance of around mid-2017. Removing the koruna limit in the first quarter of 2017 was now “out of the question” after Thursday’s meeting, he said.

Repeated Delays

Policy makers have repeatedly prolonged their guidance for the exit from the cap, set in 2013 to avert deflation, as price growth failed to materialize despite a robust economic expansion and falling unemployment. But now with inflation picking up, the central bank said at its previous meeting on Aug. 4 it expected it will reach its 2 percent target in the second quarter of next year.

“The CNB has more explicitly signaled a probable exit in the second quarter,” said Jakub Seidler, chief economist at the Czech unit of ING Groep NV. “With this move, the CNB has relinquished wider maneuvering room.”

The approaching end of the intervention regime and expectations of exchange-rate gains are luring investors into the koruna and Czech sovereign bonds. The rate on two-year notes traded at minus 0.63 percent at 3:23 p.m. in Prague after touching an intraday record low of minus 0.81 percent on Sept. 9.

Still, Rusnok said this week the room for future koruna gains wasn’t “very big,” as the pace of the country’s economic convergence with wealthier European nations would justify “real appreciation” of about 1 percent to 2 percent a year over the long term. The central bank has repeatedly said it’s ready to step into the market, even after the formal cap is removed, to stop any unjustified strengthening that could threaten its 2 percent inflation goal.

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