Czech central bankers surprised us by their comments last week, which indicate that interventions against the koruna are more likely than we originally thought.
Surprisingly, in addition to Governor Singer, his colleague Kamil Janáček also cautiously spoke in favour interventions. Hence the CNB decision scheduled for this Thursday will be made by a very narrow margin.
Bear in mind that the August forecast basically justified the launch of interventions against the koruna. The exchange rate implied by the forecast, if adjusted for the difference between the market PRIBOR rate and the predicted PRIBOR rate, was evidently weaker than the current exchange rate (our forecast is EUR/CZK 26.2). Although the CNB has been pleasantly surprised since the last forecast by a better GDP figure for the second quarter of the year, it also turned out that the key components of domestic demand – investment and household consumption – were worse than, or at best in line with, the August forecast. In addition, the CNB is again facing lower-than-expected inflation, while real wages are also developing worse than envisaged by the August forecast. In other words, the exchange rate implied by the August forecast should not change, according to the CNB, while the actual exchange rate for the last month was stronger than the central bank forecast.
All of this together may irritate the Bank Board, even some of its hesitant members. In other words, whether actually or through the lens of the CNB’s statements, the likelihood of the launch of interventions has clearly increased.
Therefore we do not rule out that the CNB Board will decide to define a new scheme, which will indicate its willingness to actively prevent the koruna, by interventions, from strengthening beyond a certain explicitly set limit. We believe the existence of such a defined (binding) ceiling for the appreciation of the koruna would be conditioned by the compliance with the current macroeconomic forecast of the CNB.