By CentralBankNews.info
The central bank of the Czech Republic, which earlier today maintained its interest rates, said there is an increased likelihood that it will continue to intervene in foreign exchange markets in 2015 to keep a lid on the koruna currency due to lower-than-expected inflation.
The Czech National Bank (CNB) began using the exchange rate as an additional tool for monetary easing in November 2013, committing itself to keeping the koruna close to 27 to the euro until the beginning of 2015.
However, after discontinuing the use of the exchange rate as a monetary policy instrument, the CNB said it now expects interest rates to remain lower than previously forecast, mainly due to a lower outlook for foreign interest rates and prices in 2015, along with a lower outlook for domestic administered prices and net inflation.
In its latest forecast, the CNB said it had cut its forecast for headline inflation by 0.4 percentage points to an average 0.8 percent in 2014 and 2.2 percent in 2015. The forecast for monetary-policy relevant inflation, which is adjusted for effects of changes to indirect taxes, calls for inflation to return towards the bank’s target by the end of this year and stay close to target in 2015.
“In a debate of the new forecast, however, the Bank Board stated that the probability of a later exit from the exchange rate commitment was increasing,” the CNB said, adding that it would prefer to maintain the exchange rate commitment if economic developments require a further easing of policy.
The new forecast shows that a return to conventional monetary policy will not imply an appreciation of the koruna’s exchange rate before the central bank started intervening because the weaker exchange rate will have passed through to the price level, the CNB said.
Immediately before the CNB’s decision to intervene on Nov. 7, 2013, the koruna was trading around 25.8 to the euro and even hit a 2012-high of 24.4 that September before gradually easing as the central bank’s board made clear that it was considering intervention to ease policy further to avoid the threat of deflation.
“The weaker koruna, without which inflation would have been deep in negative territory at the start of this year, will continue to affect inflation through import prices. However, this effect will gradually fade from the second quarter of this year onwards,” the CNB said.
The central bank also said in is statement today that its board doesn’t expect domestic interest rates to rise as fast as indicated by the latest forecast, which sees the 3-month interbank rate (PRIBOR) steady at 0.4 percent, rising to 0.9 percent in 2015, up from the previous forecast of 1.1 percent.
Headline inflation in the Czech Republic was steady for the third month in a row at 0.2 percent, well below the CNB’s target of 2.0 percent, plus/minus one percentage point.
“Starting in the second half of this year, consumer price inflation will also be strongly affected by continuing growth of the domestic economy and a recovery in wages,” the CNB said, with a moderation of the annual decline in administered prices fading in early 2015.
At the same time, the CNB expects food price inflation to accelerate slightly following a recent rise in world prices of agricultural commodities.
After the Czech economy contracted in 2012 and 2013, the CNB said economic growth is now accelerating due to external demand, an easing of domestic monetary conditions via the exchange rate and relatively robust growth in domestic demand in an environment of expansionary fiscal policy.
The CNB revised upwards revised upwards its economic growth forecast for this year to 2.6 percent from a previous 2.4 percent and the 2015 forecast to 3.3 percent from 2.8 percent, mainly due to higher investment activity in both the private and government sectors and fiscal policy expansion.
In the fourth quarter of 2013, the Czech Gross Domestic Product jumped by 0.8 percent from the third quarter for annual growth of 2.1 percent, the first quarter of growth since the fourth quarter of 2011.
The CNB also expects economic growth in the euro area to gradually pick up this year and next. Producer prices are currently falling due to the economic downturn, lower energy prices and a strong euro. But producer price are expected to return to positive, albeit subdued, growth while euro area consumer prices are rising slightly due to recovering demand.
“Overall, the outlook for the euro area has shifted towards lower inflation and easier monetary policy,” the CNB said.
Its latest forecast sees euro area consumer prices rising by only 1.1 percent this year, down from a February forecast of 1.5 percent, and 2015 prices rising by 1.7 percent, down from 1.9 percent. The 2014 forecast for euro area GDP was raised to 1.6 percent from 1.5 percent while 2015 growth was seen unchanged at 2.0 percent.
