PRAGUE: The Czech central bank will keep its weak crown policy unchanged on Thursday while looking to scrap the cap on the exchange rate around mid-2017 despite a flurry of bets that it may float the currency earlier, according to a Reuters poll of analysts.
The central bank has used a weakened exchange rate since 2013 as its main policy tool to revive inflation, which has picked up but remains below 1 percent, the lower edge of its target range of 1-3 percent.
Thirteen of 17 analysts expected the bank to leave intact its forecast that the exchange rate cap will be removed in the middle of next year.
The other four said there was a chance the bank may indicate a slightly later exit from the policy, which keeps the crown on the weak side of 27 per euro. Fourteen of 16 analysts in the poll saw the actual exit coming in the second half of next year, with just one predicting the first half of 2017. The remaining analyst anticipated the exit would occur in the first half of 2018.
The bank has said the cap can be dropped when it is sure it can consistently meet its inflation target, which is understood to be in the area of 2 percent. After its last policy meeting on Aug. 4, the bank said it still foresaw mid-2017 as the likely time to lift the cap.
The bank has been undershooting its two percent target - in place for over a decade -- due to a fall in commodity prices and other macro factors that have forced central banks globally to ease policy by non-standard means.
Governor Jiri Rusnok said earlier this month that inflation did not necessarily have to be right at 2 percent but clearly on the way above that level for the bank to end the exchange rate policy. His remarks stirred market speculation about a possibly earlier exit via the euro/crown forward markets.
MARKET PRESSURE EASES
But Rusnok quickly quashed the idea, saying at a Sept. 13 meeting with businessmen that he anticipated the exit after the July-August holiday months of 2017, a timing that chimes with the poll consensus.
Market pressure has since waned and forward markets have given back the implied future exchange rate gains, especially on shorter maturities.
The bank has repeatedly said that it has a "hard" commitment not to drop the peg before January next year.
Tomas Holub, head of the bank's policy department, said at the Rusnok meeting with businessmen that the "hard" commitment could not be moved to an earlier date but the board might consider extending it as the end of 2016 nears.
But given that the meeting on Thursday will be attended only by four board members - Vojtech Benda, Pavel Rezabek and Vice-governor Mojmir Hampl will be missing, the likelihood of any change in the policy outlook is low, Citibank chief economist Jaromir Sindel said.
"There are also other reasons behind this expectation, such as the unchanged ECB policy, August CPI almost in line with the central bank's forecast and a solid economic performance despite a holiday-related drop in industrial production," he said.
Czech gross domestic product grew by 2.6 percent in the second quarter on an annual basis, while real wages rose in that period and unemployment dropped further in August.
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