If the RBA’s right, interest rates may not fall for another year. Here’s why. 
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The latest minutes of the Czech National Bank show a consensus amongst the monetary policy board that the present policy is sufficient and that FX targeting should not be extended beyond mid-2016, nor introduce negative interest rates, said Commerzbank in a research report. However, this depends on the assumption that stable wage pressure will return inflation to the target rate soon. But wage growth has been expanding with no evident impact on inflation.
On Tuesday, Czech inflation data for June was released that indicated that the headline inflation did not accelerate from the earlier 0.1 percent year-on-year. The official core inflation data from Eurostat is not yet available; however, it is expected to have remained close to the previous 1.1 percent.
As in the case of Hungary and Poland, Czech Republic’s wage growth has also been accelerating for over a year and has averaged 3 percent since the start of 2014. In the mean time, the MPC minutes have emphasized the worry amongst board members regarding the 2017 growth projection of 3.4 percent being quite high.
Commerzbank noted that it holds a forecast of 2.8 percent growth. In all, there are downside risks to growth, while inflation continues to be quite lower than the target rate.
The CNB is still having to regularly intervene in the foreign exchange market to support the 27.00 EUR/CZK floor. The Czech National Bank purchased EUR 575 million for this purpose in May, bringing the total to EUR 12.7 billion since July 2015.
Under a scenario where the European Central Bank is expected to seek additional ways to loosen policy, the CNB is unlikely to head in the opposite direction and go ahead with normalizing policy, starting with exiting the FX targeting around mid-2017, according to Commerzbank.
Even if the Czech central bank attempted replacing this with negative interest rates, it would not be successful as even a slight decline in EUR/CZK by a mild 4 percent to 5 percent after the floor was removed, it would offset the negative interest rates in the -0.10 percent to -0.15 percent region.
“Our base-case is that declining yields around the region will prompt CNB to adopt negative rates, but that CNB will also retain the EUR/CZK floor at 27.00 through end-2017 as a necessary supportive measure,” added Commerzbank.
