By Jan Lopatka (Reuters 30. 8. 2016)
The Czech economy is growing well and a pickup in inflation above target should allow the central bank to scrap its exchange rate floor in the middle of next year, a new central bank board member said on Tuesday.
This should lead to a limited rise in the crown's value and interest rates.
The central bank has been buying euros to keep the crown currency on the weak side of 27 per euro since 2013 to avoid deflation. It has also kept the main repo rate at 0.05 percent since 2012.
"Development of core inflation is important ... and the development of this indicator tells me that we should be returning to standard policy tools in the middle of next year," Tomas Nidetzky, a former banking and insurance executive who joined the bank board in July, said in his first interview with international media.
The bank's forecast sees inflation rising to 2.2 percent in the third quarter of 2017, above the 2 percent target, from 0.5 percent in July. Core inflation excluding fuels stood at 1.1 percent in July.
Nidetzky, 46, said he saw the crown gaining ground after the exit but that would not be anything dramatic, such as a surge to around 23 per euro, the crown's all-time high briefly hit in 2008.
"I think the crown will certainly strengthen," Nidetzky said. "But I do not think it will firm in some significant way and I do not think we at the CNB would allow for any significant firming."
The exact way to scrap the currency peg remains unclear.
Nidetzky said the bank had yet to debate whether to lift the peg all at once in a surprise move or create a cascade-like path to a firmer rate. And within this path, one option would be for the bank not to determine exact steps but intervene only to halt large moves, he said.
Various scenarios would be debated as the exit comes closer.
The bank has bought 20.5 billion euros since introducing the weak-crown policy, according to latest available data for June, the latest available. The bank's balance sheet for August 1-20 suggested elevated purchases this month.
Pause fro rates
Nidetzky said he expected the bank would first drop the exchange rate peg, step in to sell crowns if needed to prevent jumps, and only start raising interest rates a few months later.
"I think that the gap may last for roughly one quarter," he said.
The bank's staff forecast assumes the rate growing to over 1 percent by end-2017.
The bank may hike rates immediately when it drops the crown peg if inflation spurts, Nidetzky said, but it could also shy away from scrapping the exchange rate floor if it seems that inflation may again fall below target.
Nidetzky also said he was against introducing negative rates, even as a market stabiliser at the moment when the exchange rate floor is removed, calling negative rates an "emergency brake" which should be left for extreme scenarios.