The EUR-CZK pair has been rising in recent weeks after remaining stable at close to its 27.00 floor for four months. This indicates that the market believes the central bank will have to break its policy status quo in the opposite direction in following months, where it will be required to increase monetary accommodation.
Inflation trends have been sliding further away from the central bank’s targets. The European Central Bank has already undertaken measures, while other CEE central banks are changing their policy in response. CNB, under this situation, is expected to set up negative interest rates to narrow its differential against the ECB. Negative rates are not yet a sure thing as wage growth in the nation is quickening and had reached close to 4% in Q4. Therefore, it might take central bank a longer time to conclude that inflation might decelerate further.
However, within the CNB board, there is an active debate on negative interest rates. This is evident from the remarks of individual members, although they caution about the problems that the negative rates will cause. However, there is a shift in wind. It appears that the CNB might take additional time to assess the effect of negative rates on banks in Switzerland and the euro area. But it is expected to cut rates into negative territory by summer. That said, the EUR-CZK is not expected to drift far from 27.00 in the near-term.
