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New CNB board embraces old policy

The renewed board of the Czech National Bank (CNB) did not change anything on the monetary policy. The FX floor remains at EUR/CZK27. The CNB once again ruled out that it would scrap it this year. It expects it would stop using the exchange rate tool in mid-2017. We believe it will stay in place eve longer until the 4Q17. Bank’s new forecast has not changed significantly. GDP and inflation estimate for this was slightly increased making no need to discuss the negative rates.

In line with our call, the CNB has not changed its monetary policy or its view on the probable timing for scrapping the FX floor. Thus, the new board under Governor Rusnok has embraced the policies pursued under Governor Singer. The FX commitment is expected to end in mid-2017, according to the new forecasts as well as the board’s guidance. The board stated again that in the event of a systematic decrease in inflation expectations, the CNB could shift the floor to weaken the koruna.  

The new forecasts see the GDP growth estimate for this year slightly higher at +2.4%, while the 2017 estimate was decreased to +3.0%. The revisions reflect a shallower but longer than expected decline in investment activity and changes to external assumptions. The inflation forecasts changed only marginally. In our view, the central bank did not fully incorporate the impact of the Brexit referendum into its prognosis. The CNB uses the Consensus Economics survey to create the external assumptions for its forecast, and the latest version of the survey was conducted in the first half of July when not all contributors had updated their Brexit forecasts. 

Given our view that Brexit will have anti-inflationary impact and that there is a risk of food price stagnation, we believe that the CNB will postpone the FX floor exit until the end of 2017. By then, the FX rate should be close to the commitment level, pressured by the real flows stemming from the sound external position of the Czech economy. 

Today’s meeting dispensed with the negative rates discussion. We also do not see a chance for their implementation at the moment. In our view, their time will come when the FX floor exit process starts, when they could serve to deter the inflow of speculative capital. If the bank board wants to further ease monetary conditions, it would prefer to weaken the koruna again.