The Czech National Bank (CNB) has decided to continue defending the EUR/CZK27 floor even though inflation hit its 2% target in December. This stance comes despite the massive interventions it has had to conduct to defend the floor. According to our estimates, the CNB was forced to buy a total of €13bn only in January. This is by far the highest figure since the beginning of the intervention regime in October 2013. Investors are thus expecting that the end of the floor is approaching and that the CZK will strengthen once the CNB stops defending it. We expect that the FX commitment will be scrapped at the regular monetary policy meeting of 4 May. It now seems probable that the exit will not be accompanied by negative rates. Governor Rusnok did not mention them in his statement.
The CNB’s stance has not changed. The central bank decided to maintain the floor at EUR/CZK27 and reiterated that it would defend it at least until end-1Q17. During the press conference, Governor Rusnok reiterated that the bank board sees the probable end of the FX commitment around mid-2017. The bank has maintained its position despite revising its inflation forecast significantly up. The prognosis shows a marginal drop in inflation in January (probably due to a fall in administered prices) but an overshooting of the 2% target over the rest of the year. Even massive inflows of capital did not change the CNB’s stance. According to our forecast, the CNB had to purchase €13bn only in January. Given the huge capital inflows, it is interesting that Governor Rusnok did not mention any discussion about negative rates. It seems that the CNB is not considering their use at the moment.
Today’s meeting has not changed our call on the CNB. We still expect that the floor will scrapped in the second quarter of this year. We believe that the regular meeting on 4 May will provide the right opportunity. In our view, the exit from the FX commitment will not be accompanied by negative rates. Nevertheless, the statement reads that “… the CNB will stand ready to use its instruments to mitigate potential excessive exchange rate fluctuations following the exit from the commitment”. We believe that these instruments include outright interventions, but negative rates might also have been on the minds of the central bankers.
CNB forecast assumes hikes, but we believe the central bank will stay on hold
The CNB forecast assumes hikes shortly after exiting the FX commitment. However, removing the EUR/CZK floor amounts to monetary policy tightening. Moreover, the exit will induce a surge in volatility on the FX market. The CNB will thus be cautious in increasing its interest rates, in our view. First, given our forecast that the ECB will end its QE programme only at end-2017 and that it won’t increase rates at least until 2021, CNB hikes would widen the interest rate differential and attract even more flows to the FX market, increasing volatility. Second, in our view, the bank board will want to see the effects on inflation of the floor removal before starting to further tighten monetary conditions.
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