Czech National Bank likely to extend EUR/CZK floor until end-2017, says Commerzbank

The Czech National Bank’s minimum exchange rate of 27.00 determines the EUR/CZK exchange rate. This year, the Czech central bank had to continue to actively defend the floor using foreign exchange intervention, which has contributed over EUR 9 billion so far in 2016 after the hefty EUR 8.3 billion in the second half of 2015.

The need for intervention has risen as the Czech National Bank board is actively communicating that it would end foreign exchange targeting around mid of next year. As the deadline approaches, there might be solid speculative inflows and appreciation pressure on the CZK. After the floor is removed, the central bank would prevent the CZK from appreciating by using negative interest rates instead of a weaker exchange rate, noted Commerzbank in a research report.

Through this year, the Czech National Bank board members have actively debated using negative interest rates and the consensus seems to be that they can use it temporarily, according to Commerzbank.

There are several different opinions on the bank board regarding the inflation outlook and requirement for additional monetary easing. This makes it tricky to anticipate exactly when the central bank might end the foreign exchange cap, stated Commerzbank. But since the inflation forecast is weaker than the forecast of CNB’s the baseline scenario is that the Czech National Bank would extend the EUR/CZK floor of 27 beyond what it promised now. It is expected to be extended until the end of next year, added Commerzbank.

There is a rising frequency of remarks from board members that the floor might even continue into 2018.