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UPDATE 3-Get ready for crown float at any moment, Czech central bank says
March 30, 2017 / 2:05 PM / 8 months ago

UPDATE 3-Get ready for crown float at any moment, Czech central bank says

* 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 (Adds details, analyst, background, links)

By Robert Muller and Jan Lopatka

PRAGUE, March 30 (Reuters) - 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 after Friday.

“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.

VOLATILITY

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

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