The Czech central bank will probably resist a renewed push from Governor Miroslav Singer to weaken the koruna as interest rates hover at just above zero.
The bank will refrain from announcing the first koruna sales since 2002 at a meeting in Prague tomorrow, according to 12 of 14 economists in a Bloomberg poll. It will keep the benchmark interest rate at what it calls a “technical zero” of 0.05 percent for a seventh meeting, almost half a point below the European Central Bank’s benchmark, according to all 15 analysts in a separate survey.
Rate setters are debating whether price growth below their 2 percent target warrants a move to weaken the koruna after three rate cuts in 2012 exhausted room for traditional monetary easing. The Ceska Narodni Banka’s board, which voted in August against starting the interventions, is weighing the strength of an economic rebound after the country exited a recession that lasted six quarters.
“It’s surely a very close call, closer than any time in the past year, but we think interventions won’t be launched,” Martin Lobotka, an analyst at Ceska Sporitelna AS, said yesterday by e-mail. “On one hand, we have better data from the real economy and a better outlook; on the other, there’s an economy that’s totally devoid of any inflationary pressures.”
The koruna has weakened 3 percent against the euro this year and has lost 0.4 percent in the past five days to trade at 25.870 as of 3:32 p.m. in Prague, according to data compiled by Bloomberg. The currency has moved to the center of policy deliberations because its depreciation would make imports more expensive and boost the competitiveness of exports, curbing deflation risks.
The currency will probably “quickly snap lower” toward 25.70 per euro if the central bank refrains from announcing the interventions, Morgan Stanley analysts said in a report today.
Eastern European policy makers are diverging as their economies show varying degrees of recovery. Hungary’s central bank cut its benchmark interest rate to a record low of 3.6 percent yesterday, while Poland kept its main rate at a record-low 2.5 percent Sept. 4 and promised to leave borrowing costs unchanged through at least year-end.
At the Czech central bank’s previous meeting on Aug. 1, the seven-member board voted for the first time on whether to start koruna sales. While Singer said after the meeting that the probability of interventions had increased, the bank didn’t disclose a breakdown of the ballot.
Singer has spoken repeatedly this year in favor of more relaxed monetary conditions. More policy easing will be needed, he said in an August interview with Euromoney magazine, posted Sept. 18 on the central bank website. Vice Governor Vladimir Tomsik and board member Lubomir Lizal may also back currency interventions, according to Jaromir Sindel, an economist at Citigroup Inc. in Prague.
The Czech economy is sending mixed signals of improving growth prospects and persisting slow price growth, Sindel said in a Sept. 24 note.
“There’s still one important factor that could persuade board members to join the three doves who probably already voted for interventions in August -- the inflation outlook, which remains low, and which will have to incorporate likely lower electricity prices,” he said.
Czech inflation unexpectedly slowed for a second month in August, reaching 1.3 percent from a year earlier after consumer prices rose 1.4 percent in July, the statistics office said Sept. 9.
Inflation relevant to monetary policy and adjusted for the primary effect of changes in indirect taxes slowed to 0.5 percent in August from 0.7 percent the previous month. It’s stayed below the central bank’s 1 percent to 3 percent tolerance band since February.
With no immediate deflation threat, the central bank doesn’t need to rush more policy easing via koruna sales, board member Kamil Janacek said in a Sept. 11 interview.
“We don’t yet have all necessary arguments for relaxing monetary conditions further in the coming weeks,” he said.