Thursday, February 6, 2014

Czech holds rate, FX targets, cuts Q1 '15 inflation forecast

    The Czech Republic's central bank maintained its benchmark two-week repo rate at 0.05 percent and confirmed its commitment to intervene on foreign exchange markets to ensure the koruna currency remains below 27 to the euro.
    The Czech National Bank (CNB) started intervening in foreign exchange markets in November after many months of deliberations, 12 months after it cut its repo rate to the current level. Last month it also confirmed its commitment to intervention which cost it 7 billion euros in November.
    The decision to intervene in FX markets until at least early 2015 was in response to the threat of deflation in addition to the wish to make Czech exporters more internationally competitive.
    There are now signs that the threat of deflation is receding but the CNB still trimmed its forecast for headline inflation in the first quarter of 2015 to 2.8 percent from 3.0 percent in its November forecast.
    Inflation in the second quarter of 2015 is forecast to remain at 2.8 percent. In the three months from January through March, headline inflation is forecast at an unchanged 0.4 percent and the forecast for the bank's preferred inflation measure is for 0.2 percent in January though March.

   Inflation in the Czech Republic December rose to 1.4 percent, up from November's 1.1 percent and the recent low of 0.9 percent in October, though still below the CNB's 2.0 percent midpoint inflation target, plus/minus one percentage points.
    In its latest forecast, the central bank raised its estimate for the economy's contraction in 2013 to 1.3 percent from November's forecast of a 0.9 percent contraction.
    But for 2014 the CNB now forecasts growth in Gross Domestic Product of 2.2 percent, up from a previous 2.1 percent, and 2.8 percent growth in 2015, up from a previous 2.5 percent.
    In the third quarter of 2013, the Czech GDP grew by 0.2 percent in the third quarter from the second quarter, but on an annual basis GDP contracted by 1.2 percent, slightly better than the second quarter's 1.7 percent contraction.
    Since the CNB started intervening, the koruna has remained below 27 to the euro, trading at 27.56 to the euro today compared with 25.84 just before the decision to intervene.



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