Fate of Czech FX cap left with future central bankers

The Czech National Bank now says that its more than 2-year old regime of capping the crown's gains is unlikely to be abandoned before mid-2017.

A statement issued following its regular policy Board meeting said:

The Bank Board states again that the Czech National Bank will not discontinue the use of the exchange rate as a monetary policy instrument before 2017. In view of the slightly anti-inflationary balance of risks to the current forecast, the Bank Board considers it likely that the commitment will be discontinued nearer to mid-2017.

While marking a small shift in the timing from the previous "in the first half of next year", the decision to change the wording must have been thoroughly considered by the Board because of its important implications.

The fresh "nearer mid-2017" guidance pushes the timing of a future decision on abandoning the crown cap safely beyond February 2017, when two new central bankers are due to join the Board and complete a reshuffle concerning a majority of the Board's seats. Between now and mid-February 2017, four out of seven Board members see their terms expire.

So the bottom line of today's statement by the Board is: Do not expect most of us - including the current Governor - to be around when a decision on exiting the crown cap is most likely to be taken.

In other words, the current Board is preparing to hand the decision, and corresponding responsibility, over to a future Board whose composition remains completely in the dark.

In yet other words, the man calling the shots is now going to be President Milos Zeman, a long-time critic of the central bank. He has the sole power to appoint central bankers in my home country and is the one to determine the future composition of the Board, and with it both the speed and the mechanism of re-introducing a floating currency.

From now on, investors need to pay even closer attention to whatever Mr. Zeman has to say about central bank policy.