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Rising inflation underpins Czech National Bank's crown cap exit

Rising inflation around euro zone has intensified speculation that Czech central bank (CNB) will terminate its FX cap earlier than the currently scheduled mid-2017. After undershooting the central bank's 2 percent goal, Czech Republic's annual consumer-price growth quickened to 1.9 percent in December following an unexpected jump to 1.5 percent in November.

CNB board members are however sounding words of caution as they realise that the inflation acceleration is mainly driven by commodity prices. CNB deputy-governor Vladimir Tomsik remarked recently that it is not sufficient for inflation to simply hit the 2 percent target before CNB abandons its intervention policy; he stressed that the board would have to feel convinced that this was happening in a long-term, sustainable manner. The view was echoed by Governor Jiri Rusnok.

"We ourselves are not convinced that euro zone core inflation is accelerating sustainably – hence, we stick with our base-case that the FX cap would be maintained until the end of 2017. But, we acknowledge that the risk of earlier exit has increased significantly over the past month." said Commerzbank in a report.

Speculation about exit from crown cap and subsequent rise in the currency has also fuelled demand for Czech government bonds despite their ultra-low yields. The yield on the two-year Czech bonds dropped 6 basis points to a record low of -1.166 percent.

"We expect the CNB to continue to guide markets towards an exit of the floor by mid-2017 to avoid any speculative pressures on the floor, but we expect an earlier removal of the floor if speculative pressures increase substantially," analysts at Goldman Sachs said in a note.

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2017-01-20 15:26:23
0m

January 20 07:00 UTC Released

DEProducer Prices YY

Actual

1.0 %

Forecast

1.0 %

Previous

0.1 %

January 20 07:00 UTC Released

DEProducer Prices MM

Actual

0.4 %

Forecast

0.4 %

Previous

0.3 %

January 23 07:00 UTC 37813781m

TRConsumer Confidence*

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Forecast

Previous

63.40

January 23 13:00 UTC 41414141m

SACPI YY*

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Forecast

Previous

2.3 %

January 23 13:00 UTC 41414141m

SACPI MM*

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Forecast

Previous

-0.2 %

January 23 13:30 UTC 41714171m

CAWholesale Trade MM

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Forecast

Previous

1.1 %

January 23 15:00 UTC 42614261m

EZConsumer Confid. Flash

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Forecast

Previous

-5.1 %

January 23 19:00 UTC 45014501m

ARAnnual Industrial Output*

Actual

Forecast

Previous

-2.5 %

January 23 21:00 UTC 46214621m

KRConsumer Sentiment Ind*

Actual

Forecast

Previous

94 bln $

January 24 00:30 UTC 48314831m

JPNikkei Mfg PMI

Actual

Forecast

Previous

52.4 %

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