WASHINGTON: The Czech National Bank (CNB) left policy rates unchanged and maintained the EUR/CZK floor at 27 in a unanimous decision at its monetary policy meeting on February 2. The CNB reiterated its plan to exit from the EUR/CZK floor in mid-2017, conditional on inflation sustainably reaching the target by then. As expected, the CNB significantly raised its inflation forecasts, in light of recent inflation developments, which saw inflation returning to the 2 percent target in December. However, the CNB still did not change its communication on the expected exit timing (mid-2017). “We will follow inflation in the coming months to see if pressures rise or fade; so far we don’t feel we need to act quickly”, said Governor Rusnok and highlighted that a robust fulfillment of the inflation target means ‘certain overshooting of the target’. Therefore, one reading at 2 percent is clearly not enough for the CNB to trigger an exit.
The central bank also confirmed its ‘hard commitment’ not to exit the exchange rate floor before Q2 17 and its readiness to intervene after the exit if needed to smooth out FX swings. Governor Jiří Rusnok also stressed that the CNB does not have a ceiling for FX reserves, in light of the recent higher intervention volumes. “We still expect a floor removal in mid-2017, when inflation sustainably reaches the CNB’s target, as FX reserves also create no great concern for now. However, with the recent inflation developments (and the upward revision in the inflation forecast), there is a considerable risk of an exit as early as Q2 17. We expect a further move down in EUR/CZK forwards over coming months as the exit draws nearer and project the cross will settle in a 25.5-26.0 range following the exit,” Danske Bank commented in its statement.
