Czech koruna may avoid Swiss-style turmoil

Subject

The central bank's plans to lift its three-year cap on koruna/euro appreciation.

Significance

Mounting speculation that the Swiss-inspired currency floor might be scrapped early has led to upward pressure on the currency, buoying demand for shorter-dated Czech local bonds and forcing the Czech National Bank (CNB) to intervene more aggressively to weaken the koruna. While inflation rose to 0.6% in August, there are fears that removing the cap could lead to excessive appreciation of the koruna, putting downward pressure on growth and inflation.

Impacts

• Concerns about ECB monetary policy efficacy, and possible early scaling-back of QE, are making Europe's bond markets increasingly jittery.
• Oil prices have risen past the psychologically important 50 dollars/barrel level, improving the outlook for inflation.
• Provided the oil price rise is sustained, this will ease pressure on central banks to loosen monetary policy further.
• The German economy's slowdown, due to a dearth of investment, is a drag on smaller CEE export-led economies such as Hungary and Slovakia.