The Czech National Bank (CNB) has kept a cap on the exchange rate of the koruna of around 27 to the euro since November 2013 after cutting the benchmark two-week repo rate to its current level of 0.05 percent in November 2012.
"A need to maintain expansionary monetary conditions to the current extent persists," the CNB said, adding its board still expects the exchange rate commitment will be "discontinued in mid-2017."
The central bank reiterated that it expects any rise in the koruna after it scraps the limit to be dampened by the hedging of exchange rate risks by exporters during the time of the exchange rate commitment as well as by closing koruna positions by financial investors.
"In addition, the CBN will stand ready to intervene to mitigate potential exchange rate fluctuations," the central bank said, seeking to dampen exchange rate speculation.
Inflation in the Czech Republic is on the rise, along with the euro area, hitting 1.5 percent in November, the high rate since June 2013 and above the CNB's forecast of 1.0 percent.
The CNB expects inflation to continue to rise and slightly exceed its 2.0 percent target in late 2017 and early 2018 before returning to the target during 2018.
"According to the current forecast, sustainable fulfillment of the target, which is a conditions for a return to conventional monetary policy, will occur from mid-2017 onwards," the CNB said, adding it considers the risks to its forecast as balanced.
In its presentation, the CNB board showed how inflation and wage growth has topped its forecasts while economic growth has been below expectations. In the third quarter of this year, the Gross Domestic Product grew by an annual rate of 1.9 percent, below the CNB's forecast of 2.5 percent.
Average wages grew by 4.5 percent in the third quarter, above a 4.2 percent forecast.
The Czech National Bank issued the following statement:
"The CNB Bank Board decided at its meeting today to keep interest rates unchanged. The two-week repo rate was maintained at 0.05%, the discount rate at 0.05% and the Lombard rate at 0.25%. The CNB Bank Board also decided to continue using the exchange rate as an additional instrument for easing the monetary conditions and confirmed the CNB’s commitment to intervene on the foreign exchange market if needed to weaken the koruna so that the exchange rate of the koruna against the euro is kept close to CZK 27/EUR.
This exchange rate commitment is one-sided. This means the CNB will not allow the koruna to appreciate to levels it would no longer be possible to interpret as “close to CZK 27/EUR”. The CNB prevents such appreciation by means of automatic and potentially unlimited interventions, i.e. by selling koruna and buying foreign currency. If the exchange rate departs from CZK 27/EUR on the weaker side, the CNB allows the koruna exchange rate to move according to supply and demand on the foreign exchange market.
More information on the CNB’s exchange rate commitment can be found on the CNB website: