Bloomberg News

Czech Central Bank Set to Seek Intervention Clues in New Outlook

May 01, 2013

The Czech central bank will seek clues in its new economic outlook today about whether currency sales are needed to stimulate the economy after cutting interest rates to effectively zero failed to end a recession.

The Ceska Narodni Banka in Prague bank will keep the benchmark interest rate at 0.05 percent for a fourth meeting, all 18 economists in a Bloomberg survey said. The Czechs will maintain a discount to the euro area’s borrowing costs even as the European Central Bank will probably cut its main rate by a quarter-point to 0.50 percent today, according to the median forecast of 70 analysts in a Bloomberg survey.

Czech policy makers, whose quarterly outlook today may reflect a weaker exchange rate, are in uncharted territory as they debate whether the first koruna sales in a decade are needed to meet their inflation goal. The economy has shrunk for five quarters, the longest contraction since at least 1996, as households and businesses spend less because of Europe’s debt crisis and government austerity measures.

“We still think the central bank should ease monetary policy sooner rather than later, but we also acknowledge that the board is split over the need for further easing,” Stanislava Pravdova-Nielsen, a Copenhagen-based Danske Bank A/S (DANSKE) analyst, said in a note before the meeting. “We do not expect the bank to use the foreign-exchange channel any time soon.”

Koruna Weakness

After three rate cuts last year exhausted the scope for further reductions, the koruna is at the center of policy deliberations as a weaker exchange rate boosts exports that account for about 80 percent of economic output, increases import prices and limits deflation risks.

The Czech currency has lost 4.6 percent to the euro since Sept. 17, the day before central bank Governor Miroslav Singer first said policy makers may sell the currency to meet their inflation goal. It was the fourth-worst performance in that period among major emerging-market peers tracked by Bloomberg.

The koruna was weaker in the first quarter than the central bank had predicted. The CNB will probably worsen its outlook for the currency in new quarterly forecasts to be presented today, according to Jan Vejmelek, chief economist at Komercni Banka AS, a Societe Generale SA unit in Prague.

Monetary authorities across the region are easing policy to help boost growth as Europe’s sovereign-debt crisis drags on. Hungary’s central bank cut the benchmark for a ninth month to 4.75 percent on April 23, while Polish rates have fallen 150 points since November to 3.25 percent. Both are record lows.

Deflation ‘Problem’

The Czech Republic doesn’t face a deflation threat that would require currency interventions now, central banker Pavel Rezabek said in an April 23 interview. Interventions should be used only in extraordinary situations and, if conducted, the primary goal would be to “solve a deflation problem,” he said.

“We’re not in a situation to realistically expect deflation in the near future,” Rezabek said. “The risk of deflation has significantly declined, and we can say it may have even been fully eliminated, unless a major shock occurs. We should be careful about using this instrument as long as inflation on the policy horizon isn’t at risk.”

The comments added to signs of a split among board members on the policy outlook after the bank said currency sales would be the next tool should it need to further ease monetary conditions.

‘Relatively Strong’

Disinflationary pressures remain “relatively strong,” Deputy Governor Vladimir Tomsik said in an April 24 interview with the Ceska Pozice news website. While the koruna is weaker now than assumed in the central bank’s February forecast, the economy faces new anti-inflationary risks, Tomsik said, adding that he couldn’t say yet whether quick action is needed.

Czech inflation was 1.7 percent in March, unchanged from February. The central bank had forecast annual inflation at 2 percent in March, the same as its target. Inflation relevant for monetary policy, defined as price growth adjusted for changes in indirect taxes, was 0.9 percent, below the central bank’s 1 percent to 3 percent target band.

The central bank in February cut its 2013 economic-growth forecast as the government’s austerity measures continue to damp demand. GDP will contract 0.3 percent this year before growing 2.1 percent in 2014, while the inflation rate will be 1.7 percent in the first and second quarters of next year, it projects.

Prime Minister Petr Necas’s government agreed last week to target a wider budget deficit in 2014 than initially planned in a bid to boost growth. The decision reduces the likelihood of currency interventions, said Mohammed Kazmi, a London-based strategist for emerging markets at RBS.

While policy makers “remain fairly split on whether to use FX intervention, we do not sense any imminent urgency for further monetary easing, given the recent weakness” in the koruna rate, Kazmi said in a report to clients on April 25.

To contact the reporter on this story: Peter Laca in Prague at

To contact the editor responsible for this story: Balazs Penz at

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