- A significant upward revision in the Czech National Bank’s (CNB) inflation forecast raises the risk of an exit from the EUR/CZK floor as early as Q2 17, although the CNB still did not change its communication of the expected exit timing (mid-2017).
- We still expect a floor removal in mid-2017, when inflation sustainably reaches the CNB’s target.
The CNB left policy rates unchanged and maintained the EUR/CZK floor at 27 at its monetary policy meeting on 2 February. The decision was unanimous. The CNB reiterated its plan to exit from the EUR/CZK floor in mid-2017, conditional on inflation sustainably reaching the target by then. It also confirmed its ‘hard commitment’ not to exit the exchange rate floor before Q2 17 and its readiness to intervene after the exit if needed to smooth out FX swings. Governor Jiří Rusnok also stressed that the CNB does not have a ceiling for FX reserves, in light of the recent higher intervention volumes.
As expected, the CNB significantly raised its inflation forecasts (see chart below), in light of recent inflation developments, which saw inflation returning to the 2% target in December. However, the CNB still did not change its communication on the expected exit timing (mid-2017). ‘We will follow inflation in the coming months to see if pressures rise or fade; so far we don’t feel we need to act quickly’, Rusnok said and highlighted that a robust fulfilment of the inflation target means ‘certain overshooting of [the] target’. So one reading at 2% is clearly not enough for the CNB to trigger an exit.
We still expect a floor removal in mid-2017, when inflation sustainably reaches the CNB’s target, as FX reserves also create no great concern for now. However, with the recent inflation developments (and the upward revision in the inflation forecast), there is a considerable risk of an exit as early as Q2 17. We expect a further move down in EUR/CZK forwards over coming months as the exit draws nearer and project the cross will settle in a 25.5-26.0 range following the exit.