CNB language could provoke more speculative activity

CNB decided unanimously to leave the key 2-week repo rate unchanged at 0.05%, and also its CZK cap policy unchanged at yesterday's board meeting. 

The CB released new growth and inflation projections, it revised up 2015 GDP growth significantly from 2.6% to 3.8% based on robust ongoing performance, but lowered 2016 growth from 3.2% to 2.8%, at the same time, the CB lowered inflation forecasts because of lower oil and commodity prices and a stronger koruna, its end-2016 forecast was lowered from 2.2% to 1.8%, which is below the 2% target. 

"Given that the FX cap is the primary monetary policy tool at this time, a downward revision in inflation forecasts would warrant an upward shift in the EUR-CZK floor from the present 27.00", says Commerzbank. 

But, Governor Singer categorically stated that no such shift is likely because deflation is no longer a threat. Singer did however commit to defend the current 27.00 floor until its designated H2 2016 'exit' timeframe, in fact, the board statement expressed readiness for automatic and unlimited intervention.

Two alternative scenarios are being anticipated, one in which CNB expressed the desire to extend the timeframe and is willing to take more potential FX intervention losses from defending the floor mechanism; the other where CNB argues that inflation is recovering by itself, hence the need to do less. 

"A signal is seen that CNB does not wish to extend the floor. This mix could trigger more speculative interest in testing the floor, EUR-CZK might move closer to 27.00 in coming weeks", added Commerzbank.