The Czech central bank will probably need to sell the koruna to weaken the currency in the second half of the year, Governor Miroslav Singer said, citing the bank’s forecast.
While the forecast shows that currency intervention isn’t necessary now, it says action is likely to be needed this year and the bank board will debate on March 28 whether to enter the market, Singer said in an interview for the Prague-based Euro weekly magazine published on its website yesterday. Marek Petrus, a central bank spokesman, confirmed the comments today and said the interview took place Feb. 25.
The Czech central bank is navigating in uncharted territory after cutting its benchmark interest rate three times last year to effectively zero. Policy makers are debating whether the longest recession on record, which is taming inflation, warrants more policy easing through a weaker koruna.
“At the next meeting, we will again contemplate whether to go ahead with it,” Singer said, according to Euro. “According to our current best assumption of this year’s developments, we will probably need an intervention into the exchange rate some time in the second half of the year.”
The koruna weakened as much as 0.4 percent today, after easing 0.5 percent last week, before paring losses and trading little changed at 25.656 to the euro as of 4:45 p.m. in Prague. It has lost 4.4 percent against Europe’s common currency since Sept. 17, a day before Singer first said the central bank may use currency sales to ease monetary conditions, according to data compiled by Bloomberg.
Singer comments were “quite a strong signal from the central bank about the need for a weaker koruna and relaxed monetary conditions,” Marek Drimal, an economist at Komercni Banka AS in Prague, said in a note to clients.
“On the other hand, it also decreases the likelihood of interventions happening in the near future,” Drimal said.
The central bank, which targets inflation, left the two-week repurchase rate at 0.05 percent for a second meeting on Feb. 6, almost three-quarters of a percentage point less than the euro-area benchmark.
The markets “didn’t fully recognize” the central bank’s comments that rates won’t rise until it sees significant inflation pressures, Singer said in the magazine interview.
“We wouldn’t want to find ourselves in a situation that happened to some central banks, which prematurely increased interest rates, and with that they slowed the economy too much,” he said. “We gave a signal that interest rates will go up only when we are fully certain that we won’t have to relax monetary policy for some time.”
The bank in February cut its economic forecasts for 2013 as the government’s austerity measures continue to damp demand. It sees 2013 gross domestic product contracting 0.3 percent, compared with a previous estimate of 0.2 percent growth.
GDP shrank 0.2 percent in the final three months of last year, marking the fourth consecutive quarterly decline, according to preliminary data.
Inflation was the slowest in 16 months in January, with the annual rate dropping to 1.9 percent from 2.4 percent in December. Inflation relevant for monetary policy, defined as price growth adjusted for changes in indirect taxes, was 1.1 percent, unchanged from December and near the lower end of the central bank’s 1 percent to 3 percent target band.