EUR/CZK likely to linger around 27.00 for time being as eurozone inflation turns softer again, says Commerzbank

EUR-CZK rose mildly following yesterday's CNB board meeting and the commentary. The slight weakening of CZK reflects the slight downward revision which CNB made to its inflation forecast.

The central bank revised its GDP growth forecast up for 2017 from 2.8 percent to 2.9 percent, yet revised its inflation forecast down: it now forecasts 2.1 percent inflation for Q2 2017 (revised lower from 2.3 percent) and 2 percent for Q3 (revised from 2.1 percent). What is more, food and energy prices are seen to be playing a major role in current inflation acceleration – which means that CNB has only weak conviction about underlying inflation really stabilising at 2 percent.

In fact, the recent sharp slide in the oil price must be clouding the inflation outlook even more for CNB than it was doing a month ago. CNB has to sound internally consistent – so, having removed the EUR-CZK floor in April, it continues to promise that the rest of monetary policy will be normalised.

"But, in our view, this will not progress automatically, and will really depend on inflation around euro zone and in the Czech Republic stabilizing at 2 percent or above; we are not convinced that underlying inflation will behave this strongly or, at least, that there will not be major doubts about this in coming months. As a result, we forecast EUR-CZK to linger around 27.00 for the time being as euro zone inflation turns softer again," Commerzbank commented in its latest research report.