Czech FX cap seen scrapped in April or May as inflation rises

The Czech central bank will exit its cap on currency strength in April or May and may do so outside of regularly planned policy meetings, a Reuters poll showed on Wednesday, as inflation picks up faster than expected. The central bank meets for a regular monetary policy meeting on March 30, just before the expiry of its pledge that it will definitely not remove an exchange rate floor of 27.0 crowns per euro before the end of the first quarter.
Five out of 15 analysts said the bank would wait until the next regular policy meeting on May 4 to remove the floor, and two saw a move on another date in May. "Our sense is that the cap will be lifted at the MPC meeting on May 4th," said William Jackson of Capital Economics.
"May's meeting is the first in the quarter and coincides with the release of a new Inflation Report containing updated forecasts." But six others said the bank would move in April, which means the decision would be made outside regular policy meetings, perhaps after March inflation data on April 10. Two saw a move in June, possibly after May inflation data on June 9.
The Czech central bank holds policy meetings every six weeks but meets on other issues on most Thursdays and can also call an ad-hoc meeting. Inflation jumped to 2.5 percent in February - above the bank's target of 2 percent, and 0.4 percentage points above its latest forecast. The bank has signalled it does not mind some inflation overshooting as that would give it a buffer in case the crown firms after the policy is scrapped and depresses inflation so much that it would have to reintroduce extraordinary measures.
The timing of the exit from the weak-crown policy is key for investors holding crowns and for companies in the highly trade-dependent Czech economy. Investors piled into the crown and companies ramped up hedging of export revenues, forcing the bank to buy an estimated 27 billion euros from the market since January. Foreign holdings of state bonds, where some of the purchased crowns end up, jumped to 39 percent of the total stock in January from 24 percent a year before.
The capital inflow has led to views by market players as well as the central bank that the crown may not jump after the floor is dropped, as had been previously expected, as crown sellers may have a hard time finding counterparties. But analysts saw the crown stronger after the floor is dropped. The median forecast for the euro/crown rate one month after the exit was 26.45. The median forecast for the strongest point at which the crown would trade within six months of the exit was 25.60.