Dovish Czech Monetary Policy Statement

March 26, 2015

the latest policy meeting ended with Czech monetary officials retaining a technical zero interest rate policy attested by the 0.05% two-week repo rate, as well as an asymmetric currency policy to prevent koruna appreciation beyond 27 per euro with automatic unlimited intervention.  A very dovish statement commits to maintaining the currency cap throughout the forecast period, that is into the second half of next year, and officials moreover warn that the odds have increased that the intervention-imposed ceiling on the exchange rate will be adjusted to a weaker level.

The Czech National Bank remains ready to move the level of the exchange rate commitment if there were to be a long-term increase in deflation pressures capable of causing a slump in domestic demand, renewed risks of deflation in the Czech economy and a systematic decrease in inflation expectations.

The greater willingness to ease monetary conditions further is underscored and defended by the assertion that domestic wages and the koruna-euro exchange rate have moved in the anti-inflationary direction since the last policy meeting, thereby increasing the risk of second-order deflation following the downward oil price shock.  Officials expect low growth in 2015 but seek growth of 3% next year and wish to lift inflation to 2.0% by late 2016.

The Czech interest rate has been at 0.05% since the last in a series of eleven cuts, which was made in November 2012.  The 27 koruna per euro ceiling was imposed in November 2013.  A similar cap on the Swiss franc’s euro cross in September 2011 but abandoned this past January in a move that shocked markets.

Copyright 2015, Larry Greenberg.  All rights reserved.  No secondary distribution without express permission.



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