Czech National Bank Keeps Existing Policy Stance

February 2, 2017

The Czech National Bank Board retained a 0.05% two-week repo rate, the prevailing level since November 2011, and recommitted to an asymmetric currency policy that since November 2012 has used the threat of intervention and actual koruna sales to keep the Czech currency from strengthening past 27 per euro. That commitment is set to be lifted around the middle of this year, that is in about five months, and the koruna is seen likely to appreciate thereafter, according to today’s released  statement.

A new macroeconomic forecast was introduced that incorporates the greater-than-expected acceleration of inflation late last year. CPI inflation is projected to rise soon into the upper half of its tolerated corridor around the 2% target but “will then return to the 2% target from above at the monetary policy horizon, i.e. in the first half of next year. Domestic costs will continue to rise apace, due mainly to rising wages. Coupled with renewed growth in industrial producer prices in the euro area, this will lead to a further increase in core inflation. Counteracting this will be a strengthening of the koruna expected by the forecast from mid-2017 onwards” after the 27/euro ceiling has been eliminated.

Summarizing the new forecasts, the statement explains,

Compared to the previous forecast, the inflation outlook for this year is higher. This is due to the surprisingly strong increase in inflation at the close of last year, the higher short-term inflation forecast and faster growth in nominal wages. At the monetary policy horizon, however, the new inflation outlook differs only slightly from the previous forecast. The forecast for the growth of the Czech economy in the near future has been revised downwards on account of a lower contribution of net exports. From the whole-year perspective, however, the economic growth forecast for this year and the next is only slightly lower. Following the assumed exit from the exchange rate commitment, interest rates will rise at a slower pace than according to the previous forecast.

The Bank Board assessed the risks to the forecast at the monetary policy horizon as being balanced. The main uncertainty is the evolution of the koruna exchange rate following the exit from the exchange rate commitment, which may fluctuate in either direction in the short term. The CNB will stand ready to use its instruments to mitigate potential excessive exchange rate fluctuations following the exit from the commitment.

That statement doesn’t address the uncertainty created by a new U.S. government less allied with Western Europe and less predisposed to preventing Russia from reestablishing a stronger influence over Eastern Europe.

Copyright 2017, Larry Greenberg. All rights reserved. No secondary distribution without express permission.



Comments are closed.