Czech inflation unlikely to pick up; CNB likely to extend time frame of EUR/CZK floor beyond 2017

The EUR/CZK pair has fallen the way back towards its 27.00 floor in the past two months following a sharp rise to 27.15 around the end of June. In the meantime, the Czech National Bank has abstained from extending the FX floor’s timeframe from the present mid-2017. Also it has not spoken about negative interest rates during its last board meeting.

The CNB seems to be happy with the economy’s and inflation’s progress so far. The Czech National Bank is having to actively intervene again to defend the EUR/CZK floor. Foreign exchange reserves grew sharply in the first half of August. Part of this was from EU fund inflow; however, even after accounting for this, the increase is severe. This indicates towards the greater FX intervention as the likely cause, said Commerzbank in a research note.

Speculative inflows might pick up as the timeframe for the exit from the floor mechanism comes closer, unless CNB were to announce countering monetary policy measures such as negative interest rates.

“Our base-case remains that inflation will fail to pick up materially, and that CNB will end up pushing the exit beyond 2017, and will also introduce negative interest rates by the end of 2016”, added Commerzbank.

However, the latter possibility would rely on what the central banks in Europe, the ECB especially, would do in the meantime. As of now, the central banks around Europe are expected to further ease monetary policy.