CNB's risk of later exit from FX regime increases

The central bank of Czech Republic is currently satisfied with its monetary policy. Therefore, no change is expected on moetary policy at the upcoming meeting of the bank's board. The key interest rate remains at 'technical zero' and the FX floor at EUR/CZK 27. Recent discussions focused on the timing of the exit from the FX regime and the possible introduction of negative interest rates. The risk of a later exit has increased. Negative interest rates are not likely to be on the agenda but might be considered in the event of massive speculative capital inflows, states Societe Generale.

At its last meeting, the central bank's board concluded that its current monetary policy will ensure the return of inflation towards the 2% target. This was then confirmed in public appearances by Governor Singer and probable future governor Rusnok. Although inflation has decreased significantly since the last meeting, the CNB has been surprised mainly by food inflation and fuel prices. These volatile items do not attract much attention from a monetary policy point of view, and we therefore do not expect the CNB to further loosen monetary conditions at the upcoming board meeting.

The discussion on the timing and strategy of the exit from the FX regime has started, and market participants have already questioned the CNB's commitment to the regime. At the end of July, the CNB purchased EUR1bn and the intervention volume multiplied in August1. CNB board members have been repeatedly asked about excessive FX reserve accumulation, and their answer is always the same: The CNB is ready purchase as many euros as necessary regardless of the FX reserve level. The CNB guides that an exit from the regime will not occur before Q3 16, and it is expected to come after the board is reshuffled in early Q3 16, says Societe Generale.