CNB to keep its EUR/CZK floor in place until H2 16

After the ECB meeting last week, more QE are expected to be announced at the ECB meeting in December together with a deposit rate cut. More ECB easing is a factor that will keep the CNB worried about the potential strengthening of the CZK once the floor has been abandoned. However, it is also a factor that could put more pressure on the forward curve.

As it is observed, the rise in inflation will be the main trigger for the CNB to abandon its currency floor. The inflation rate in January is expected to be clearly above 1%, which is also the CNB's forecast. January inflation numbers will be released in mid-February.

The CNB introduced the EUR/CZK floor when inflation fell below the lower boundary of its inflation tolerance band (2% +/-1% point) and its key rate had already reached zero. 

"It is believed that the sustained return of inflation to the tolerance band will take away the main argument for keeping the floor in place. Moreover, there is little reason for the Czech National Bank (CNB) to keep its EUR/CZK floor in place until the second half of 2016", states Nordea Bank.