The Czech National Bank (CNB) maintained its rates at technically zero and said it would continue to use the exchange rate as a monetary policy instrument at least until 2016, pushing back the timeframe for any exit from keeping down the koruna currency by at least six months.
The CNB, which started using the exchange rate as an additional tool for monetary easing in November 2013, also said it would "have to find a further noticeable increase in anti-inflationary factors before moving the exchange rate commitment to a weaker level."
The CNB has a one-sided commitment to prevent the koruna from exceeding 27 to the euro and repeated that it would intervene in foreign exchange markets to avoid any "excessive appreciation" by selling koruna and buying foreign currency. Below 27 to the euro, the CNB will allow the exchange rate to float according to supply and demand.
The koruna eased in response to the CNB's decision to delay any exit from its weak koruna policy, falling to 27.66 to the euro from 27.55 prior to the decision. It ended 2013 at 27.33.
The eventual return to conventional monetary policy does not imply that the CNB expects the koruna to appreciate to the level seen before it started intervening - the koruna was trading around 25 to the euro most of 2013 - as it expects the weaker exchange rate to have been passed through to prices.
The CNB, which cut its benchmark repo rate to the current level in November 2012, also revised its economic forecasts with inflation seen averaging 0.4 percent this year and 1.8 percent next year, 0.4 percentage points lower than in its previous forecast from May.
In June headline inflation in the Czech Republic rate fell to zero from 0.4 percent in May, but the CNB expects inflation to rise gradually in the third quarter of this year and hit the central bank's 2.0 percent target in the second half of 2015 before staying close to this level in 2016.
Its previous forecast saw inflation rising to 2.2 percent in the third quarter of 2015 before easing to 1.9 percent in the fourth quarter of next year.
The change in the CNB's forecast is based on lower inflation and easier monetary policy in the euro area, with external economic activity picking up its pace the year and next before a modest slowdown is assume for 2016.
The main risk to its forecast is longer-lasting "very subdued" inflation in the euro area.
The price of Brent crude oil rose temporarily in the previous quarter, shifting the CNB's outlook upwards, but it still expects oil prices to start falling gradually through 2016 and the euro is now forecast to average 1.36 to the U.S. dollar in 2014 compared with its previous forecast of 1.35 and then rise to 1.31 in 2015, down from 1.29 previously forecast, and remain at 1.31 in 2016.
Forecast for economic growth have been revised upward, mainly to due a faster-than-expected recovery in private investment and strong household consumption, while growth in 2015 will be slightly lower than expected due to less expansionary fiscal policy.
Growth in Gross Domestic Product is seen averaging 2.9 percent this year, up from a previous forecast of 2.6 percent, and 3.0 percent in 2015, down from the previous forecast of 3.3 percent. For 2016 growth is seen at 2.8 percent.
In the first quarter of this year, GDP expanded by 0.8 percent for annual growth of 2.9 percent, up from 1.1 percent in the fourth quarter when the Czech economy started improving after shrinking for seven consecutive quarters.