Czech koruna eased to 27.50 EUR/CZK

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Czech koruna eased to 27.50 EUR/CZK

NBH will again cut rates by 10 basis points

The Czech koruna eased to its one-month low against the euro yesterday. The overall volatility has remained very low nevertheless and we expect that it will not rise significantly in coming months either. According to CNB Governor Singer, central bankers are cautiously optimistic regarding economic growth and due to disinflation pressures ready to prolong the temporary FX intervention regime at least until mid 2015. As for other regional FX markets, the Polish zloty as well as the Hungarian forint varied inside a relatively narrow range around their current levels.

Today the regional focus will be on a rate-setting meeting of the Hungarian central bank. In line with market consensus, we believe that the NBH is going to deliver another 10 bps rate cut after which the base rate will reach its new all time low (2.2 %). Inflation is the principal argument in favour of the rate cut. Hungarian inflation slipped into negative territory in April and has continued to fall deeper since then. In June, the headline inflation was -0.3 % y/y. Given latest inflation readings, the NBH lowered its inflation forecast for 2014 from 0.7 % to 0.0 %. It is worth nothing, though, that a substantial portion of the price fall is due to administrative price cuts while the core inflation remains around 2.5 %. Another argument for the expected rate cut is CDS spreads, which, although having widened recently, remain near their all-time lows. On the other hand, the Hungarian forint has been relatively weak and further easing of monetary policy would make his recovery harder. The weak forint is a serious issue in Hungary mainly due to a considerable volume of outstanding FX loans. After long discussions, the government finally prepared a relief scheme for those indebted in foreign currency, according to which Hungary’s banks will be obliged to convert foreign currency-denominated loans into forint loans most probably at the end of this year (December 31 – January 1).