* Bank drops soft guidance to end weak-crown around mid-year
* Market anticipating exit is near, bet on firmer crown
* Governor says move can happen any time after April 1
* Crown weakens to 1-1/2 year low as some close positions
* Graphic of crown/euro bit.ly/2ofoklU
* TAKE A LOOK: GRAPHIC: tmsnrt.rs/2jipWYu
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By Robert Muller and Jan Lopatka
PRAGUE, March 30 The Czech central bank dropped
its guidance of a likely mid-year exit from its exchange rate
cap on Thursday, sending a loud signal to markets that the end
of the ultra-loose policy may be near.
Governor Jiri Rusnok said after a board meeting that the
bank could end its cap on the crown anytime from April 1 but
would not indicate more clearly when that might happen.
Markets have increasingly bet the bank would soon unshackle
the crown. It has been prevented from firming past 27 to the
euro since 2013 to revive inflation by raising import prices.
Tens of billion of euros -- Patria Finance estimates 50-60
billion -- have flowed into the market in anticipation the
currency will firm, putting increasing pressure on the cap.
But after the meeting, the crown fell to its weakest against
the euro since September 2015, dropping more than half a percent
to touch 27.24 to the euro, as investors, betting the cap would
be gone already by Thursday, closed their positions.
The bank had signalled a mid-2017 exit for the past year
before Thursday's change. It also has a hard commitment to not
end the policy before the end of the first quarter, which ends
"We will not further indicate any ... scenarios when it can
or cannot happen," Rusnok told reporters. "Simply said, it can
happen any time after the end of this hard commitment."
The bank has said that it wants to see "sustainable
fulfilment" of its 2 percent inflation target before freeing the
crown. It wants to avoid the risk of having to return to using
the exchange rate or other unconventional policy tool in case of
a downward shock to inflation.
Rusnok said a pick-up in inflation -- which reached 2.5
percent in February -- came sooner than expected. He said that
while there were upward risks to that outlook in the short-term,
the picture was more mixed looking longer ahead.
"We are certainly closer to the fulfilment of the
sustainable inflation criterion than we had been before," he
said top explain why the bank dropped the mid-year guidance.
The central bank had to buy more than 30 billion euros,
according to estimates, from the market since January to defend
the cap, about as much as in the previous three years combined,
and Thursday' language convinced some market players exit could
happen in the first days of April.
Michal Brozka, a Raiffeisenbank strategist, said the bank
may still opt to wait for further data, such as March inflation
due on April 10 or even updated staff forecasts due at its next
policy meeting on May 4.
"But it is also possible the opinion that there is nothing
more to wait for will prevail in the board and the exit will
come within a few days," he said.
Central bankers have said investors face the risk of lacking
counterparties to cash out of positions. This could lead to
volatility on the market and even chances the crown will weaken
initially after the exit.
"It is going to be a volatile time (around the exit)," a
trader said on Thursday.
Fair value calculations suggest the crown's rise could be
limited to around 5 percent over time.
(Writing by Jason Hovet Editing by Jeremy Gaunt)