Despite the absence of three board members and no new inflation forecast, the CNB board surprised with a decision to extend the minimum duration of its FX commitment to 2Q17 (a so-called “hard commitment”). The board made this step even though it still views risks to the forecast as neutral. The so-called “soft commitment” remained unchanged; the probable exit timing is mid-2017 according to the CNB board.
The CNB board delivered a small surprise. It did not change the level of the FX commitment but prolonged its minimum duration until the end of 1Q17. The “hard” and “soft” commitments thus converged as the bank board did not change its view on the probable timing of the commitment. The board still assumes that it will scrap the floor in mid-2017. Although we expected the convergence of the “hard” and “soft” commitments as late as at the following monetary policy meeting, we still see this as corroboration of our view that the exit process will be transparent rather than a surprise. We expect that the floor could be scrapped as late as the fourth quarter. We think that the risks lie on the side of an earlier exit (2Q17 or 3Q17) rather than in 2018. On the other hand, the market believes there is a higher chance that the FX floor will be history in one year and thus the one-year forward exchange rate appreciated.
Governor Rusnok evaluated the recent developments as roughly in line with the last forecast. GDP growth surprised by being stronger than expected, while wage growth lagged slightly behind. The bank board still views the risks to forecasts as neutral.
We expect the twelve-month EUR/CZK forward rate to appreciate in the coming months with the exit approaching. Also, the forwards with shorter maturities should continue to appreciate for the same reason.