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UPDATE 1-Czech central bank keeps crown cap, timing of exit in focus
February 5, 2015 / 3:33 PM / 3 years ago

UPDATE 1-Czech central bank keeps crown cap, timing of exit in focus

* Bank delays ending use of FX to loosen policy until H2 2016

* Says can tolerate falling consumer prices in 2015

* Price growth should come back in 2016

* Ready to weaken crown further if deflationary risks grow (Adds comments from central bank statement, economic forecasts, crown)

By Jan Lopatka and Robert Muller

PRAGUE, Feb 5 (Reuters) - The Czech central bank extended its outlook for keeping the crown weak into the second half of 2016 on Thursday, in light of deflationary tendencies caused by a slump in oil prices and a weak euro zone economy.

The bank, as expected, maintained its pledge to intervene if the crown strengthened through 27 per euro and reiterated it would not respond to direct effects of low oil prices.

The shift to a later exit is the third time the bank has extended the use of its intervention policy. It made the value of the crown its main tool to loosen monetary conditions in November 2013, having cut interest rates to near zero the year before that.

The bank warned on Thursday it could move the crown level to a weaker level if more deflationary pressures appear from abroad, outweighing signals from the accelerating domestic economy.

“(The bank) is prepared to tolerate inflation moving temporarily close to, or even slightly below, zero this year. Next year, however, the first-round effects of this shock will unwind, and it remains the ... bank’s intention to ensure that inflation returns towards the 2 percent target,” Governor Miroslav Singer said, reading out a statement.

”Therefore, it will be important to prevent any second-round effects of the current slump in energy commodity prices, which would be reflected in inflation in the longer run.

“The bank board therefore again stated that the level of the exchange rate commitment could be moved.”

The bank said triggers for a move would be a long-term rise in deflationary pressures that might hurt domestic demand, a renewal of deflationary risks for the domestic economy and a systematic drop in inflationary expectations.

Before Thursday’s meeting, the bank had said it would not lift the cap on the value of the crown before 2016. The crown traded steady on the day at 27.735 to the euro.

The board’s policy decision was based on a new quarterly forecast that saw higher growth, in part thanks to a positive shock from the low oil prices and lower inflation.

It saw inflation falling below zero in the second and third quarters this year before rising to 1.1 percent in the first quarter of 2016 -- significantly below previous forecasts.

Economic growth was predicted to pick up to 2.6 percent this year and 3.0 percent next year.

The central bank cited three main risks to its forecast: the unknown impact of the European Central Bank’s policy loosening through a bond-buying programme approved last month; unexpected wage developments in the low-inflationary environment; and the oil price shock. (Editing by Jason Hovet)

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