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The CNB has left rates unchanged, and the FX floor remains at EUR/CZK27. The statement no longer included the sentence that the exit would not occur before H2 16. However, Governor Singer said that the floor would probably be scrapped at the end of 2016.
"We believe the original commitment holds, that is to say, that the floor will not be scrapped before Q3 16. We understand his words to be a mere verbal intervention, which should prevent testing the floor. Governor Singer has launched a new round in the game of nerves in an effort, we think, to deter speculative capital inflow by keeping the markets unsure about the true timing of the exit", says Societe Generale.
Despite lower realized inflation, the CNB's forecast has slightly increased in terms of the monetary policy horizon. In line with our outlook, it signals that inflation should hit the target at the very end of 2016. The GDP forecast was also revised up to 4.7% in 2015 and a slowdown to 2.8% in 2016.
"We believe that growth in the first quarter of this year was driven to some extent by the change in pre-stocking practices with respect to a change tobacco tax methodology and that growth should slow down in the second half of the year. We see average growth for the year at 4.2%", added Societe Generale.
The interest rate forecast caught the attention. It points to four 25bp hikes in the first half of the 2017. Given the outlook on ECB rates, the ECB deposit rate should be -0.3% at that moment. The interest rate differential would attract more capital inflow into CZK, creating appreciation pressure. It would make more sense for the CNB to exit the intervention regime earlier and hike less, and this is what will happen.
Despite the change in CNB language, economists do not see any reason to change the view that the floor will be scrapped in Q3 16. First, the inflation rate is rising and is hitting the inflationary target at the monetary policy horizon. Second, consumer demand remains strong and GDP growth solid. Third, the CNB's projected interest rate path shows four hikes shortly after removing the floor, which is excessive. Fourth, there will be a board reshuffle in Q3 16, and the president will likely appoint two new board members who oppose the intervention policy.
