The Czech central bank began unlimited koruna sales “for as long as needed” to ease monetary policy after inflation slowed to the least in 3 1/2 years. The Czech currency plunged the most since at least 1999.
The Ceska Narodni Banka today started selling the currency for the first time in more than a decade to keep it “near” 27 per euro and push inflation back toward its target, Governor Miroslav Singer said. The koruna lost as much as 4.4 percent, the worst performance among 31 emerging-market currencies and the biggest intraday loss since Bloomberg started tracking the currency pair.
“It’s clear to us that we are in this for a long time,” Singer told reporters today in Prague. “We will only end the intervention regime when we decide that we’re facing dramatic inflation pressure that would justify a significant change in the monetary policy toward tightening.”
After three rate cuts in 2012 exhausted room for traditional monetary easing, Czech policy makers are trying to head off the risk of deflation. The central bank’s board, which rejected the interventions in August and September, had been assessing the strength of an economic rebound after the country exited a recession that lasted six quarters.
The koruna has shifted to the center of policy deliberations because its depreciation would make imports more expensive and boost the competitiveness of exports, curbing deflation risks. Foreign-exchange interventions are meant to ensure that inflation returns toward the bank’s 2 percent target within the 18 month policy horizon, Singer said.
With koruna sales, consumer prices will grow 2.2 percent in the fourth quarter of 2014, compared with 1.2 percent inflation the central bank envisaged without the effect of currency interventions, according the bank’s forecasts published today.
While the central bank may “theoretically” change the desired koruna rate at future meetings, such a move is unlikely, according Singer.
“It is impossible to reflect all changes in our view of the economic conditions by changing the desired exchange-rate the way we did with interest rates,” Singer said. “That means a change of the desired exchange rate will require a significantly bigger change in the situation and it will undoubtedly happen very rarely or never.”
European policy makers are diverging as economies show varying degrees of recovery. The European Central Bank unexpectedly cut its main rate by a quarter-point to 0.25 percent today, while Poland left borrowing costs at an all-time low of 2.5 percent yesterday and pledged to keep rates on hold until at least mid-2014.
Since the previous meeting, Czech statistics office data showed September consumer price growth slowed to 1 percent, the lowest inflation rate since March 2010 and below the central bank’s 1.4 percent forecast for that month.
Inflation relevant to monetary policy and adjusted for the primary effect of changes in indirect taxes slowed to 0.2 percent in September from 0.5 percent the previous month. It’s now “deep below” the bank’s 1 percent to 3 percent target and has undershot the range since February, the bank said.
Industrial output rose 7.1 percent in September, beating analyst forecasts. Accelerating exports helped widen the trade surplus to 35.1 billion koruna ($1.8 billion), the largest this year, from 19.2 billion koruna in August.
“We had thought that the improvements in the latest activity and survey data would prevent another vote on unconventional easing from passing today,” said William Jackson, an emerging-markets analyst at Capital Economics Ltd. in London. “However, the balance on the MPC seems to have been tipped by the drop in inflation last month.”
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