Czechs Stick to Koruna-Cap Exit Plan Despite Inflation Spikeby and
Central bank maintains outlook for ending koruna cap mid-2017
Rusnok says core CPI signals no dangerous inflation trend
The Czech central bank said it sees no need to rush the exit from its Swiss-style currency cap, vowing to stick to its mid-2017 time frame for the move even as it forecasts higher inflation for this year.
Rate setters in Prague on Thursday upheld the mix of near-zero borrowing costs and interventions to weaken the koruna. Governor Jiri Rusnok said the board made no “substantial change” to its timetable for scrapping the limit on currency appreciation. The bank also affirmed what it calls a “hard commitment” of continuing with the interventions at least until the end of the first quarter.
The resurgent inflation, partly driven by volatile commodity costs, is posing a dilemma for policy makers across Europe as they try to avoid a premature exit from monetary stimulus. The Czech National Bank raised its forecast of price growth for this year following its acceleration to the 2 percent target in December. This is no reason to bring forward the exit from the intervention policy, according to Rusnok.
“We certainly don’t feel any need for a hasty reaction,” Rusnok told reporters after the meeting. “We need to see robust fulfillment of the target, and for us, that means some overshooting of this inflation target.”
The monetary authority reviewed its policy after a spike in inflows into the koruna last month. The currency was now “overbought,” which may cause its depreciation after the return to conventional instruments, Rusnok said. The bank will be prepared to mitigate “excessive” koruna moves following the exit, he said.
January interventions may “easily be at least double” the previous record monthly amount of 7.5 billion euros ($8.1 billion) from November 2013, said Radomir Jac, chief economist at Generali Investments CEE in Prague, citing estimates based on the central bank’s latest balance-sheet data.
Some investors have since scaled their bets on an early exit from the cap, with the retreat visible in the derivatives market where 12-month forwards have erased almost all of their January gains in the past three weeks. The spot-market exchange rate was unchanged at 27.025 per euro as of 4:31 p.m. in Prague.
The central bank’s new forecast sees inflation at 2.7 percent in the third quarter of this year, an increase from the previous prediction of 2 percent for the period. It sees 2.6 percent price growth in the final three months of 2017, compared with the previous estimate of 2.3 percent.
“The message about the timing of the exit from the foreign-exchange commitment isn’t very consistent with the new inflation outlook,” said Jakub Seidler, chief economist at the Czech unit of ING Groep NV. “But such a stance is not that surprising either. The CNB must try to convince the market that the end of the commitment isn’t imminent so that it can limit further inflows of speculative capital.”