Czech central bank more likely to intervene in FX

    The Czech National Bank (CNB), which earlier today kept its policy rate steady at 0.05 percent, repeated that it would hold interest rates at the current level until "inflation pressures increase significantly" but added that it is now more likely to use intervention in foreign exchange markets to keep the koruna currency low.
    The Czech Republic's central bank first raised the issue of using foreign exchange market intervention to lower the koruna currency last September and in May it said it was ready to use intervention if further policy easing becomes necessary.
    In its presentation to a press conference today, the bank sharpened its language, saying "the likelihood of launching foreign exchange interventions to ease monetary policy has increased further."
    "Given the zero lower bound on monetary policy rates, this points to a need for easing monetary policy using other instruments," it added.
    The CNB also revised its forecasts, projecting a contraction in the country's 2013 Gross Domestic Product growth of 1.5 percent, up from its previous forecast of shrinkage of 0.5 percent, but then revised upwards its 2014 growth forecast to 2.1 percent from 1.8 percent and 3.3 percent growth in 2015.

      The CNB also revised downwards its inflation forecast, projecting consumer price growth of 1.7 percent in the third quarter of 2014, down from a previous 1.9 percent, and 1.8 percent in the fourth quarter of next year, down from 2.0 percent.
    "The new forecast does not predict an increase in inflation pressures and no tangible risks of such an increase in inflation pressures can be identified either," the bank said, adding:
    "The risks to the new forecast are skewed towards a need for easier monetary conditions."
    Headline inflation this year will be below the central bank's 2.0 percent target while the monetary-policy relevant inflation will be below the bank's lower tolerance boundary. The bank has a one percentage point tolerance band around its 2 percent target.
    Inflation in the Czech Republic rose to 1.6 percent in June from 1.3 percent in May while the country's GDP contracted by 1.3 percent in the first quarter from the fourth, the seventh quarterly contraction in a row. On an annual basis, GDP shrank by 2.4 percent.
    The koruna has weakened against the euro ever since the central bank governor last September signaled that it may sell the currency in markets. This year the koruna is down 3.4 percent against the euro, quoted at around 26 to the euro today.
    In its latest forecast, the CNB projects and average koruna/euro rate of 25.7 this year, up from its earlier forecast of 25.6, then 25.6 in 2014, up from 25.3, and then 25.2 to the euro in 2015.

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