CNB: interventions against CZK until 2016

With risks to inflation on the downside, the CNB decided to prolong the exchange rate as an monetary-policy instrument until at least 2016.

According to a new forecast, CNB rates should remain unchanged until at least the third quarter of 2015, but in reality a hike would come later.

The new forecast envisages lower inflation and faster economic growth.

Another forced weakening of the koruna is not on the agenda – serious downside inflationary pressures (most likely from the euro area) would have to occur.

More optimistic central bank

At its meeting held on the last day of July, the CNB Board had new economic forecasts at hand. Unlike the previous forecast, this one envisages faster economic growth and lower inflation within the effective horizon of the monetary policy. Thus, influenced by the figures for the first quarter of the year, amongst other factors, the central bank has changed its GDP growth prediction for this year, from 2.6% to 2.9%, and concurrently has lowered the outlook for next year by 0.3%‐points. In addition, the central bank predicts 0.4%‐points lower inflation for this year as well as the next. Even so, inflation should return to the vicinity of the target in about a year, and monetary relevant inflation approximately in late 2016. The new outlook prepared by the Czech National Bank reflects lower inflationary pressures from the euro area, just like this year’s lower economic growth in this area, and anticipated low euro market rates.

The Board postpones the exit from the FX regime to 2016

However, the details of the forecast were not at all awaited as eagerly as the decision on the exchange rate of the koruna. The speculations that the lower threshold might be moved higher from the current EUR/CZK 27 proved to be false.

At the press conference after the meeting, the Governor reiterated a similar conclusion as previously, i.e., before moving the exchange rate commitment to a weaker level “the Bank Board would have to find a further noticeable increase in anti‐inflationary factors”. By contrast, the expectation that the CNB would use the exchange rate as a monetary policy instrument longer than it had stated thus far proved to be correct.

While the previous forecast envisaged the nearest possible departure in the first quarter of 2015, with the second quarter cited after the previous meeting, now the forecast cites the third quarter of 2015 as the horizon. Nevertheless, with the risks to inflation slightly on the downside, the Bank Board decided to continue using the exchange rate as a monetary policy instrument at least until 2016. At the same time the Bank Board would have to find a further noticeable increase in anti‐inflationary factors before moving the exchange rate commitment to a weaker level. In this respect it is worth noting that previous forecast envisaged the nearest possible departure in the first quarter of 2015, with the second quarter cited after the previous meeting, now the forecast cites the third quarter of 2015 as the horizon.

To sum up: bullish days of the Czech koruna have been counted for some time or at least until 2016.

Will the CNB hike its rates next year? No.

For the sake of completeness, we should perhaps only add that the CNB Board unanimously decided to keep its base interest rate at technical zero (0.05%). The new forecast predicts that the repo rate will remain at this level until the third quarter of next year. Afterwards, implied market rates (Pribor 3M) should rise quite rapidly, by approximately 0.5 percentage point.

However, unlike the CNB forecast, we still expect the CNB’s base interest rate to remain stable at its current level throughout next year. We do not believe that the CNB is likely to start tightening its monetary policy before the expiration of the period when the central bank wishes to keep the koruna weak (until 2016).