Inflation Drowns Out Czech Central Bank’s Koruna Cap Messageby and
Majority of economists see koruna-cap exit in second quarter
Only one respondent forecasts negative Czech interest rates
The Czech central bank’s communications offensive may be falling on deaf ears.
Policy makers in Prague launched a media push this month to convince investors that a sudden spike in inflation isn’t changing their view that they’ll probably scrap the Swiss-inspired currency cap mid-year. But economists see a rising likelihood that the lid preventing the koruna from appreciating beyond 27 against the euro will end sooner than the bank’s guidance shows.
Twelve out of 17 economists polled last week said the Czech National Bank will end the regime in the second quarter. Five of them see the change in April, the most popular answer in the survey. In a similar survey five months ago, most respondents predicted the cap to stay in place at least until October. The shift in expectations came despite central bankers’ repeated assurances about their mostly likely timetable before a Feb. 2 meeting when they’ll present new economic forecasts.
“I expect the CNB’s inflation projections to shift higher in the upcoming February update and this could support an earlier removal of the euro-koruna floor,” said Gabor Ambrus, a strategist at NatWest Markets in London who predicts the exit at an extraordinary policy meeting in April. “I don’t think that it would impact their credibility if they deviated from what they said was most likely.”
As inflation resurfaces in Europe, the central bank is preparing to jump ahead of its euro-zone counterpart in dismantling unconventional monetary stimulus that has helped reignite economic growth after a record-long recession. Czech consumer price growth unexpectedly accelerated to reach the 2 percent target in December, prompting investors to pour on bets into the koruna in expectation of an imminent removal of the cap and a quick payoff.
Governor Jiri Rusnok and other central bankers sought to counter that speculation, saying that on-target price growth isn’t an automatic trigger to drop the cap. They also warned against expectations of a quick windfall, arguing that the currency may be more volatile after the exit and reiterating they won’t allow it to appreciate beyond what they see justified by the economy’s fundamentals.
Central bank’s interventions in January “may be easily at least double” the previous record monthly amount of 7.5 billion euros from November 2013, Radomir Jac, chief economist at Generali Investments CEE in Prague, said on Friday, citing estimates based on CNB’s latest balance sheet data. While some investors have since scaled back their bets on an early cap exit, with the retreat visible in derivatives market, the median estimate of economists’ forecasts in the Bloomberg survey still showed the currency to gaining to 26.1 per euro by the end of 2017.
Vice Governor Mojmir Hampl also underlined the central bank’s pledge to maintain the intervention regime at least until the end of March, and none of the analysts in the Bloomberg survey questioned that commitment. But Hampl signaled the bank won’t announce the exact exit timing beforehand, saying the move will be a result of deliberations and individual assessments of the board members of inflation trends. That’s why, he said, the bank’s language may “seem a bit more ambiguous” as it approaches the decision.
While several central bankers also said they weren’t worried about expanding the bank’s balance sheet by printing koruna to counter the inflows with interventions, some economists said the rising level of foreign-exchange reserves may influence policy makers’ deliberations.
“The exact timing of the exit will depend on speculative inflows -- the bigger they are, the higher the CNB’s motivation to get rid of the limit,” said David Navratil, chief economist at Ceska Sporitelna AS, which also sees the intervention regime falling away in April. “A decision made outside a regular monetary-policy meeting will in no way reduce the CNB’s transparency, as everyone understands that this type of a move has to be a bit unexpected.”