The CNB Board met expectations and left its interest rates unchanged. While taking its decision, the CNB Board had a new forecast available, which unsurprisingly envisages temporarily worsened economic performance, a weaker koruna, and lower inflation. The risks to the new forecast are on the downside. Last but not least, the Czech National Bank reiterated after its Thursday meeting that it is ready to use foreign exchange interventions, “if further monetary policy easing becomes necessary”.
In its new forecast, the CNB slightly worsened the overall outlook for the Czech economy for both this year and the next. In addition, it significantly reduced its inflation forecast for this year and very slightly increased the inflation forecast for 2014. Moreover, the CNB anticipates a decline in market interest rates to as low as 0.3% in late 2013, but this is actually the same value as we saw in February’s forecast. We should stress that, according to the CNB, official interest rates will remain at technical zero over a longer horizon, as the central bank currently sees no inflation pressures for this year and the next. The tenor of the forecast is as follows: “Consistent with the forecast is a slight decline in market interest rates, followed by a rise in rates in 2014”. Of the outcomes of the press conference, we should mention that such a rise would be possible if a recovery (in the euro area) should occur at that time.
The central bank’s view on the exchange rate of the Czech koruna has changed a bit. The CNB currently sees the EUR/CZK 25.50 level at the end of the year (the previous forecast implied the 25.20 level in December). Moreover, the CNB model suggests that the currency should be at the EUR/CZK 25.70 for this quarter.
The latest forecast does not signal any aggressive move by the central bank, although it emphases downside inflation risks and also includes temporarily lower inflation expectations. This is why we do not believe that, at its current levels, the koruna might be a reason for the possible interventions that have been so greatly discussed in the media. For the coming week, we therefore expect a steady wait-and-see attitude from the CNB, with forex interventions rather at the verbal level. After all, as indirectly stated at the press conference, the current exchange rate of the koruna does not compel the central bank to continue to ease monetary conditions.