OREANDA-NEWS. Both the floor on the euro-Czech koruna exchange rate and its possible removal in 2017 are consistent with Fitch Ratings' view that the Czech Republic benefits from a credible and advanced monetary policy framework.

Removing the floor would be neutral for the sovereign's 'A+'/Stable rating, which is supported by the monetary policy framework. Macro-financial risks associated with removing the floor appear manageable and no direct negative impact on public finances should arise from central bank losses linked to balance-sheet expansion.

Introduced in November 2013, the floor has helped growth recover, improved external metrics and should eventually boost inflation. It has created risks associated with speculative inflows (which have increased the share of government debt held by non-residents) and accelerating credit growth, but we think these are mitigated by a liquid and resilient banking system.

Last week, the Czech National Bank (CNB) said that it would continue to use the exchange rate as a monetary policy tool until at least 2Q17. The approach of an exit could exacerbate some risks associated with inflows and central bank interventions, but we believe the economic impact of koruna appreciation will be limited. The CNB has said it stands ready to intervene to smooth volatility and/or limit appreciation.

Koruna appreciation would likely see the CNB make losses on its large foreign-exchange assets holdings. However, this should not have a negative impact on either the sovereign's fiscal position (the CNB does not usually pay the government a dividend) or on its ability to conduct monetary policy.