EUR/CZK 27 and will extend its forward guidance

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CNB will keep its commitment to keep the koruna above

EUR/CZK 27 and will extend its forward guidance

The regional currencies were under a mild pressure on Wednesday in the afternoon after the US dollar strengthened on better than expected results of GDP growth and solid ADP report. The zloty and the forint were traditionally more volatile than the koruna which however also hit nearly a six-month low against the euro ahead of today’s CNB meeting.

The last day of July will be the date of this year’s fifth CNB Board meeting to discuss monetary policy. The agenda will also include a new forecast, which is likely to postpone the departure from the existing exchange rate regime to a later period. The most recent forecast (released in May) envisages that the koruna will remain close to CZK 27 per EUR ‘until’ early next year (only). However, subsequent comments from the Czech National Bank favoured the second quarter of next year, albeit any postponement to a later period should not come as a great surprise either. We believe that another likely change to the forecast may be a reduction of the inflation outlook for late this year and for 2015, as may be a downwards adjustment of the predicted 3-month PRIBOR, which would actually mean a postponement of the predicted timing of the first rate hike from the first quarter of next year to further into the future. From this perspective, the new forecast should be closer to the market view as well as to our expectations of a later departure from the intervention regime and even a later commencement of monetary tightening. As concerns the speculations about weakening the koruna, we do not believe that the CNB Board will take any step in this respect.