CNB likely to lower key rate to negative in H2; EUR/CZK floor to be maintained at 27 through 2017-end

The Czech National Bank’s minimum exchange rate of 27.000 still determines the EUR/CZK exchange rate. In the second half of 2015, the Czech central bank intervened in order to defend the floor that added to EUR 8.3 billion. This was over EUR 7.5 billion the central bank used initially to set up the floor in 2013. If the monetary policy is not eased further by the central bank, pressure on the floor is expected to rise again in 2016.

A negative depo rate exists even in Hungary now. Expecting the possible issues from allowing the interest rate differentials to widen, board members of the Czech central bank have begun talking about negative interest rates. As the Czech central bank is orthodox and does not use unconventional policies, there is a certain amount of discomfort regarding such measures. There are some who oppose the view of negative rates, while some are supporting.

With the difference of opinions amongst the board members and opposition from political leaders, policymakers are in a flux regarding which measure to undertake: a rise to the exchange rate floor or negative interest rates. This debate is leading towards conflicting hints to the market.

“Our baseline scenario, which is anchored to our view that the ECB will ease policy again by winter, is that CNB will drop its benchmark rate to negative this H2, and progressively lower it to -0.20% by the end of 2017”, said Commerzbank in a research report.

Moreover, the EUR/CZK floor is likely to be maintained at 27 through the end of 2017, added Commerzbank. According to the central bank’s official guidance, the floor will be removed in the first half of 2017. However, this is based on inflation attaining the target rate at about the same time. But, the current disinflation in the country, which is described to be for short-term, is likely to be prolonged, noted Commerzbank. The outlook for the EUR/CZK will quite rely on how inflation behaves.