CNB keeps rates flat, continues forex interventions regime


31.07.2014 16:43

Prague - The Bank Board of the Czech National Bank (CNB) kept interest rates unchanged at record low levels again today and will continue the regime of forex interventions to keep the crown's rate near Kc27/EUR, CNB spokesman Tomas Zimmermann has said.


Zasedací místnost bankovní rady České národní banky (ČNB) - ilustrační foto. ČTK Šulová Kateřina, ČTK

The central bank has kept interest rates at all-time lows for more than a year and a half already, the basic rate being 0.05 percent.

The CNB Bank Board launched forex interventions in November last year in order to prevent deflation.

The CNB Bank Board repeated today it considers the commitment regarding the crown as one-sided. The CNB will prevent the crown's firming below the level of Kc27 per euro using interventions, that is by selling crowns and purchasing foreign currencies, the board said.

If the crown weakens above Kc27 per euro, the CNB will let the rate move depending on the supply and demand on the forex market, the board said.

Six out of seven CNB Bank Board members were present at today's meeting of the board. The meeting was not attended by CNB vice-governor Mojmir Hampl.

The press conference after the meeting, at which the CNB will also present a new macroeconomic forecast, will start at 14:15.

The CNB launched forex interventions because it wanted to ease monetary conditions and avert the threat of deflation.

The CNB Bank Board said at the end of this June it will not exit the interventions regime earlier than in the second quarter of 2015.

Most analysts believe that the central bank will continue in the interventions until the second half of next year, but some do not rule out that the regime will continue until 2016.

Some analysts recently said the CNB could weaken the crown further if the economic development worsened markedly and the economy faced the threat of deflation again.

CNB expects faster GDP growth in 2014, interventions until 2016

The Czech National Bank has improved its outlook of Czech gross domestic product (GDP) growth in 2014 to 2.9 percent in its new forecast, but for next year it worsened the outlook to 3 percent, CNB governor Miroslav Singer said at a press conference today.

The CNB Bank Board also said it will not exit the forex interventions regime earlier than in 2016.

In its previous forecast from May, the CNB expected the economy to expand by 2.6 percent this year and by 3.3 percent next year. It has so far expected to leave the interventions regime in Q2 2015 at the earliest.

"The CNB Bank Board states that the CNB will not stop using the exchange rate as an instrument of the monetary policy earlier than in 2016," Singer said.

In order to make the crown even weaker, the CNB Bank Board would have to see a further distinct strengthening of influences acting against price growth, said Singer.

A negative development in the euro zone could now be such a development, according to Singer.

"It is hard for me to assess the situation in the euro zone, which is crucial for this. We can see signs of a recovery there. But, on the other hand, the drop in expectations of price development continues and data do not suggest that this could turn around," Singer said.

"If it is accompanied by some economic shock, this would be the crucial reason for such a decision," he added.

The new forecast expects to keep the crown's rate near Kc27/EUR and continue the interventions regime until the third quarter of next year.

Risks to the possible development are assessed as moderately anti-inflationary by the CNB in the new forecast.

The forecast always expects an economic development based on available data, and the CNB Bank Board can comment on such an estimate and adopt its own stance on it.

"We can see that the CNB does not have to intervene as last year in November. By putting off the exit from the intervention regime, it sent a clear message that it wishes the crown to remains weaker for a longer time," analyst Miroslav Novak of company Akcenta said.

The crown weakened in reaction to the CNB's statement and after 15:00 traded at Kc27.63/EUR, which was its several-month low.

David Navratil, chief economist of the Ceska sporitelna bank, said the end of interventions will be gradual.

"In other words, the CNB will say one day the exit has started, but then it will restrain the crown's firming in roughly the next six months. It will stop using the exchange rate as a monetary policy instrument only after these six months," Navratil said.

"In other words, the exit can 'already' start in autumn 2015," Navratil added.

According to the new forecast, inflation should reach 2 percent in the third and fourth quarter of 2015. In its previous forecast, the CNB expected inflation to reach 2.2 percent in Q3 2015 and 1.9 percent in Q4 2015.

"The forecast expects that overall inflation will start to increase gradually in the third quarter of 2014 and will return to the 2 percent target in the second half of next year," Singer said.

The average inflation will be 0.4 percent this year and 1.8 percent next year, according to the CNB.

Market interest rates should stay at the current very low levels until Q3 2015, according to Singer.

The Czech Finance Ministry significantly improved its economic growth outlook for this year to 2.7 percent in its latest forecast, released on Monday, from 1.7 percent in its April forecast.

In 2015, the ministry expects the economy to expand by 2.5 percent-

The European Commission predicts a 2 percent growth of Czech economy this year and a 2.4 percent growth in 2015.


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