Bloomberg News

Czechs Keep Rates Near Zero as Split Board Mulls Currency Sales

March 28, 2013

The Czech central bank kept interest rates near zero for a third meeting as policy makers debate whether to stimulate an economy racked by a record-long recession through a weaker koruna.

The Ceska Narodni Banka kept the main two-week rate at 0.05 percent, in line with forecasts of all 20 analysts in a Bloomberg survey and almost three-quarters of a percentage point less than the euro-area benchmark. Governor Miroslav Singer, who had said the March meeting would feature talk on the currency, will hold a news briefing at 2:30 p.m. in Prague.

Monetary authorities from the U.K. to Japan are easing policy, fueling a depreciation of their currencies, while the Czech central bank ponders its first intervention in a decade. A weaker koruna would help exports, which make up 80 percent of a $217 billion economy that has contracted for four quarters amid government austerity measures and Europe’s debt crisis.

“Data have generally surprised the CNB on the downside, but the central bank is likely not in a rush to ease monetary conditions,” Mai Doan, economist at Bank of America Merrill Lynch in London, said in a March 26 report to clients. This week’s board decision “will likely disappoint those expecting concrete signals for FX intervention.”

The koruna is at the center of the policy plans as its depreciation helps boost competitiveness of Czech goods on foreign markets and makes imports more expensive, thus limiting deflation risks. The currency has lost 4.6 percent to the euro since Sept. 17, a day before Singer first said the central bank may sell the currency to meet its inflation goal.

Koruna’s Performance

The koruna had the fourth-worst performance among 25 emerging-market currencies tracked by Bloomberg in the period. The decline was also outdone by a 14.2 percent fall in the Japanese yen against the euro and matched by the British pound’s loss since Sept. 17.

The koruna has traded at 25.538 to the euro on average so far this year, in line with the central bank’s forecast for the first quarter. It was 0.1 percent stronger at 25.754 per euro as of 12:50 p.m. in Prague.

In the past month, several board members have voiced differing views on what policy setting is appropriate to meet the inflation target. The forecast of the central bank, whose mandate is price stability, signals that currency sales may be needed in the second half of the year, Singer said in an interview published in Euro magazine on March. 4.

His comments echoed Feb. 26 remarks by board member Lubomir Lizal, while Kamil Janacek was cited as telling Reuters March 19 that no intervention is needed as monetary conditions are relaxed enough to allow for a gradual economic recovery.

Deflationary Spiral

For Hampl, the Czech economy isn’t in danger of falling into a deflationary spiral now that would warrant koruna sales.

“For me personally, a trigger for interventions would be the moment when I see a highly probable risk of a long-lasting, devastating deflationary spiral,” Hampl in a March 18 interview. “I personally don’t see such a strong risk yet. It can’t be ruled out that this risk will appear in the future, but I don’t see it materializing for now.”

The seven-member board, which was split on monetary easing at five meetings last year, would have to approve the use of direct interventions as a policy tool, Singer said. The bank last sold the koruna to stem its appreciation in 2002.

The inflation rate dropped to 1.7 percent in February from 1.9 percent in January, below the central bank’s 2 percent target. Fourth-quarter gross domestic product shrank 0.2 percent from the previous three months, the fourth consecutive quarterly contraction.

GDP Forecasts

The central bank in February cut its economic forecast for 2013 as the government’s austerity measures continue to damp demand. It projects GDP contracting 0.3 percent this year before growing 2.1 percent in 2014. The inflation rate is seen at 1.7 percent in the first and second quarters of next year.

Central banks in the region are cutting borrowing costs to foster economic growth. Hungary lowered its main interest rate this week to a record low of 5 percent. Poland has also cut its benchmark to a record, reducing it by a half-point to 3.25 percent on March 6.

Hampl and Janacek’s comments were “hawkish” because they clashed with the central bank’s forecast, which assumes a “further, moderate decline in interest rates,” said Jaromir Sindel, an economist at Citigroup Inc. in Prague, by e-mail.

The Czech currency will ease further to 25.8 per euro in the second quarter, according to the median forecast in a Bloomberg survey of 23 analysts. That would be weaker than the central bank’s forecast of 25.3 per euro for the quarter.

The koruna “is slightly weaker than the central bank expected in its forecast,” Jan Vejmelek, chief economist at Societe Generale SA’s unit Komercni Banka AS (KOMB), said in an e-mail yesterday. “We don’t expect the central bankers to use direct market interventions against the domestic currency, moreover, we don’t see using verbal interventions as urgent either.”

To contact the reporter on this story: Peter Laca in Prague at placa@bloomberg.net

To contact the editor responsible for this story: Balazs Penz at bpenz@bloomberg.net


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