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CNB is not concerned about ECB actions

The Czech national bank (CNB) did not surprise, keeping the FX commitment and its guidance unchanged. The minimum duration of the floor was confirmed until the end of 2Q17, and the bank board still considers probable that the floor will be scrapped around mid-2017. The CNB sees the risks to its forecast as balanced. At the press conference, Governor Rusnok disclosed that the CNB is not to react on the prolongation of the ECB asset purchasing program. Today’s meeting has not changed our view. We still believe the floor will be removed in 2Q17, as inflation is expected to hit the 2% target in the first months of 2017.  

At thr last week’s meeting, the CNB decided to maintain the floor at EUR/CZK27, and reiterated that it would defend it at least until end-1Q17. During the press conference, Governor Rusnok reiterated that the bank board sees the probable end of the FX commitment around mid-2017. The bank board sees the risks to its inflationary forecast as balanced even though November’s inflation deviated 0.5pp from the CNB forecast, wage growth surprised on the upside, and the share of unemployed decreased more sharply than the CNB expected. Only GDP growth did not meet CNB expectations. The central bank even confirmed that it sees inflation hitting the target as late as at the turn of 2017/2018. Our estimates show inflation at 2% as soon as the first months of the next year with a non-negligible risk that it will hit the target in December this year. Thus, we still think that the CNB will be surprised by high inflation in the coming months. Given our bullish forecast, we assume that the floor will be scrapped in 2Q17.  

At the press conference, Governor Rusnok confirmed our view that the CNB is not very concerned with the recent decision of his colleagues at the ECB to prolong the Asset Purchasing Program (APP). He repeated that domestic conditions will be the key driver in decision-making about the exit.

Governor Rusnok disclosed that there is a minority view within the bank board according to which the exit should be accompanied by the introduction of negative rates. Such a step would aim to decrease the interest rate differential which would deter some speculative capital inflows. We believe that the current minority view will receive majority support when speculative flows rapidly intensify at the beginning of the year. In our view, the CNB will introduce selective negative rates to smooth the exit process.