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Czech central bank won't move FX cap but keep it for longer: poll

Tuesday, February 3, 2015 - 22:32

[PRAGUE] The Czech central bank (CNB) will not move its exchange rate cap to a weaker level when it meets on Feb 5, but mounting deflationary pressures could keep the policy in place for longer than planned, a Reuters poll shows.

The bank intervened to weaken the crown in November 2013 to fend off deflation and set a cap on the softer exchange rate.

It pledged last July to keep the cap into 2016, as downward price pressures from abroad outweigh any inflationary forces from the growing domestic economy.

Czech annual inflation eased to just 0.1 per cent in December. The central bank board will on Thursday release an updated forecast for inflation, focusing on the horizon of its monetary policy - 12 to 18 months from now.

The crown dropped to a six-year low of 28.520 per euro in early January on speculation the bank may respond to falling oil and food prices, along with deflationary pressures from the euro zone, by moving the cap, now at 27 per euro, to a weaker level of 29 or 30.

The market steadied after Governor Miroslav Singer said the central bank did not need to react quickly to the drop in commodity prices.

Twelve out of 13 analysts in the Reuters poll said the bank would not raise the exchange rate cap again before it exits the policy.

But eight respondents pushed back their expectations of when the bank would remove the cap and return to standard policy using interest rates.

"Falling inflation will likely prompt the CNB to delay its exit from monetary stimulus, keeping the crown weak longer than expected," said Moody's Analytic analyst Tomas Holinka.

Eight analysts predicted an exit in the second half of 2016, three in the first half of 2017 and only one saw it in the second quarter of 2016.

In the previous poll in December, five analysts forecast the exit before mid-2016, six before end-2016 and two in the first quarter of 2017.

The bank's last quarterly forecast from November saw inflation at 1.5 per cent in the fourth quarter of 2015. The new forecast is expected to show prices falling in coming months and recovering more slowly than previously expected.

The Czech fight against deflation could get some help from the European Central Bank's bond-buying programme if that succeeds in supporting prices of imports from the curency bloc.

One analyst in the poll said the bank will have to move the crown level to 30 crowns per euro in the first half of this year.

REUTERS