Czech Central Bank Set to Debate Currency Role for Policy

Czech central bankers are set to prolong their debate on whether to ease monetary policy by weakening the currency with interest rates at effectively zero and inflation stuck below target.

The Ceska Narodni Banka will leave the benchmark interest rate at what it calls a “technical zero” of 0.05 percent for a fifth policy meeting today, according to all 21 analysts in a Bloomberg survey. It will announce the decision at 1 p.m. in Prague and has scheduled a news conference for 2:30 p.m.

The bank is in uncharted territory after reducing rates three times last year in reaction to a recession. The $217 billion economy shrank for six consecutive quarters through March, its longest contraction on record. With households and businesses curbing spending, the central bank began pondering in 2012 whether currency intervention is needed to help meet its 2 percent inflation target within 18 months.

“The initial state of the Czech economy, particularly inflation being below the CNB’s forecast and the weaker outlook for foreign demand, is likely to keep the CNB in a slightly dovish mode,” Jaromir Sindel, an economist at Citigroup Inc. in Prague, said yesterday by e-mail.

After the bank exhausted room for interest-rate cuts, the koruna assumed the central role in policy plans as its depreciation helps boost competitiveness of exports and makes imports more expensive, limiting deflation risks.

Downward Trajectory

The currency has lost 5.2 percent against the euro since Sept. 17, the day before Governor Miroslav Singer first said policy makers may sell the currency to meet their inflation goal. It weakened 0.3 percent to 25.894 against the euro by 5:10 p.m. yesterday in Prague. The yield on the government’s 10-year koruna bond fell 6 basis points, or 0.06 percentage point, to 2.343 percent.

The seven-member board, which would need to approve the first direct currency intervention in more than a decade, is divided on how much action is needed.

“Now it seems much more likely that there will be a need to intervene, compared with what it appeared to be at the beginning of the year,” board member Lubomir Lizal said June 17 in an interview. The bank isn’t “behind the curve” on easing monetary conditions as currency sales have a faster impact than interest-rate cuts, he said.

Kamil Janacek, another board member, “so far” doesn’t see reasons making an immediate intervention necessary, Reuters reported June 13, citing an interview.

Three-Year Low

Consumer prices grew 1.3 percent from a year earlier in May, the slowest pace in almost three years as the cost of natural gas fell and mobile-phone operators cut charges. That compared with the central bank’s estimate of 1.6 percent.

Inflation relevant for monetary policy, defined as price growth adjusted for changes in indirect taxes, was 0.6 percent in May, below the 1 percent to 3 percent target band, according to the central bank.

While central banks across eastern Europe have been trimming borrowing costs to help revive their economies, indications that the U.S. Federal Reserve may wind down stimulus have triggered a selloff in emerging-market assets and made some policy makers warier to ease further.

Poland should avoid cutting rates in July as the risk of weakening the zloty and sparking capital outflows outweighs any economic benefit, central banker Andrzej Kazmierczak said June 21 in an interview. Hungarian policy makers pledged “increased caution” after recent market turmoil even as they lowered their main rate to a record low 4.25 percent June 25.

Household Rebound

The Czech economy contracted 2.2 percent from a year earlier in the first quarter. Even as the recession deepened, the GDP data showed some signs of improvement as household spending rebounded, according to Lizal.

While the need for further monetary policy easing is probably higher than before the May 2 meeting, it’s not high enough to make interventions the baseline forecast, according to Martin Lobotka, an analyst at Ceska Sporitelna AS in Prague.

“The CNB will certainly discuss these, there may even be voting on this as some doves, for instance Lizal, seemed to have warmed up to this idea after the GDP and CPI data,” Lobotka said in a June 24 note. “In the end, though, the outcome will be as before -– we’re ready to intervene but not yet.”

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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