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Koruna clings on to gains after central bank comments

Amid the deafening dawn chorus of monetary policy hawks this week, you’d be forgiven for having missed the Czech National Bank. But its latest comments have given the koruna another nudge higher.

The central bank left interest rates on hold yesterday, nearly three months after it scrapped its policy of holding down the koruna. There were no surprises in the decision to hold fire in June, but policymakers also delivered some decent hints of rate rises later this year.

“The exit from the exchange rate commitment in April was the first step towards a gradual return of the overall monetary conditions to normal,” it said in its statement. “Economic activity in the Czech Republic’s main trading partner countries is continuing to rise at a solid pace. Its outlook for this year increased slightly, reflecting faster growth at the start of this year and favourable leading indicators for Q2. Producer price inflation also shifted slightly upwards for this year.”

The comments were, of course, nuanced. But if this week shows you nothing else, it should be that markets have a tendency to focus only on certain points. One euro now buys CZK26.24, set against the earlier peg of CZK27 – an orderly break to a currency-management policy by any standards.

The Czech National Bank is, according to analyst Petr Krpata at ING at least, “the big hawk in town”:

According to the Board, the latest developments are well in line with the [its] latest macro forecast (which also assumes interest rate hikes this year). This suggests that the Board expects the start of the hiking cycle in 3Q17, indicating the possibility of the first rate increase in early August or late September. The Bank Board sees slight pro-inflationary risks to its CPI forecast given the stronger economic activity. Anti-inflationary risks are concentrated in the recent fall in oil prices. But in our view, the decline in oil prices will not affect the CNB’s intention to abandon the zero bound.

If the market reaction after the first “testing” rate increase of 20bp in 3Q is moderate, the probability of a second rate increase at the end of this year is also growing. Note that another hike in 4Q17 is also the assumption of the latest CNB forecast.

Commerzbank is not so sure:

We ourselves forecast one rate hike this year, taking the benchmark rate from the ‘technical zero’ of 0.05% to 0.25% – but we view this as a one-off adjustment, not a hiking ‘cycle’. We still think that it would be extremely bold of CNB to launch off into a regular hiking cycle without the ECB or any other CEE central bank ready to do so.

The CNB is likely to keep reiterating that rate hikes may be delayed if the koruna was to appreciate strongly – and this in turn is likely to act as a natural cap on how fast the currency can appreciate.