Board of the Czech National Bank kept its monetary policy on hold again on Thursday as per expectations. The central bank did not change its view on the likely timing for exiting the FX floor either. CNB Governor Miroslav Singer repeated his statement that the board still considers it “likely that the commitment will be discontinued in mid-2017.”
The projection of the new staff will include the estimated affect of Brexit on the nation’s economic development and the market reaction. The new forecast would be prepared only by the August meeting. Singer, during the press conference, called the UK’s decision “a new uncertainty”.
The August meeting, which will be attended by two new board members Tomas Nidetzky and Vojtech Benda, is expected to bring in a change in working, said Societe Generale in a research report.
“We expect the CNB to alter the statement to “The Bank Board considers it likely that the commitment will be discontinued after mid-2017””, added Societe Generale.
Hence, the forward guidance might then move towards the view of an exit from the FX floor in the third quarter of 2017. However, there has been a rise in the risks of a later exit, but the Brexit and its impacts on the global economy and financial markets are the largest uncertainties. Nonetheless, there are also risks to inflation from low food prices. Inflation attaining the target rate of 2 percent is a requirement for an exit from the FX floor.
During its meeting on Thursday, the Czech National Bank did not talk negative rates. This affirms the view that a rate reduction to negative would only be possible as a defence line against sharp speculative attack against the floor, according to Societe Generale. Meanwhile, the present anti-inflationary risks are curtailing pressures for a stronger CZK. The central bank is expected to go on board with negative rates only during an exit time and through a two-tier system that penalizes excess liquidity, noted Societe Generale.
The CNB’s board had mentioned that the central bank can shift the floor to weaker levels of koruna in case of a “systematic decrease in inflation expectations”. If there is a rise in deflationary pressures, the central bank might then set the floor at EUR/CZK 29 at a minimum. But this scenario is quite unlikely.
“We expect the EUR/CZK exchange rate to head towards the current FX floor of 27 in the coming weeks on the back of strong economic performance. The widened spread between CZK and EUR yields could also attract foreign investors into koruna assets,” stated Societe Generale.
