Czech holds rate, signals readiness to intervene in FX

    The Czech Republic's central bank left its benchmark two-week repo rate steady at 0.05 percent, as expected, and said it was "ready to use the exchange rate if further monetary policy easing becomes necessary."
    "The probability of launching foreign exchange interventions has not changed and remains high," said the Czech National Bank (CNB), adding that interest rates are first forecast to rise in 2015 and "given the zero lower bound on monetary policy rates, this points to a need for easing monetary policy using other instruments."
    "The risks to the inflation forecast are slightly on the downside, tilted toward the need for slightly easier monetary conditions," the strongest sign to date that the CNB is ready to intervene in foreign exchange markets to push down the koruna's exchange rate.
    The Czech central bank first raised the possibility of selling the koruna currency in September 2012 and cut rates to essentially zero in November. It has repeatedly said it is ready to use foreign exchange intervention as a way to ease policy conditions further.
    The koruna has depreciated gradually since last September but has been largely steady in the last three months, trading at 25.7 to the euro today, the same as on June 1 but down some five percent from 24.36 to the euro in mid-September.

    The CNB said its current inflation report "does not predict an increase in inflation pressures and no tangible risks of such an increase in inflation pressures can be identified either."
    Inflation in the Czech Republic in August eased to 1.3 percent, down from 1.4 percent in July, continuing the trend of declining inflation seen since mid-2012. The CNB forecasts 1.7 percent headline inflation this year, 1.9 percent next year and 2.1 percent in 2015.
    The central bank targets inflation of 2.0 percent, plus/minus one percentage point.
    "No cost-push inflation pressures are apparent and the outlook for administered prices is shifting downward," the CNB said in its presentation.
    The Czech economy expanded by 0.6 percent in the second quarter from the first but in annual terms Gross Domestic Product contracted by 1.3 percent, the sixth quarter of economic contraction. In the first half, the economy shrank by an annual 1.9 percent.
    The CNB forecasts average growth of only 0.3 percent this year,, 1.4 percent in 2014 and 2.0 percent in 2015.
   
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