Currency Interventions Jumped Before Czechs Delayed Cap Exit

  • Central bank foreign-currency purchases quadrupled in December
  • Policy makers discussed negative interest rates last week

The Czech central bank stepped up koruna sales in December, about a month before it announced the extension of its intervention regime and considered more measures to defend the Swiss-style currency cap.

Policy makers in Prague bought foreign currencies worth 1.54 billion euros ($1.72 billion) in the last month of 2015 to prevent the exchange rate from appreciating past the limit set at about 27 per euro, the Czech National Bank said on its website on Monday. The intervention volume was more than four times higher than in the previous month and the highest since September.

Robust economic growth in the Czech Republic and the European Central Bank’s expanded monetary stimulus are boosting demand for the koruna, forcing rate setters in Prague to deter capital inflows that could undermine their efforts to push up inflation. The central bank last week extended the duration of the currency cap, pledging to keep it in place until 2017, and said it was considering negative interest rates as an additional tool.

“Mounting pressure on the koruna exchange rate and a significant increase in currency interventions would prompt the CNB to seriously consider imposing negative interest rates,” said Radomir Jac, chief economist at Generali Investments CEE in Prague. “I still believe that the Czech central bank would only take that step as a measure of last resort.”

The central bank also said that its foreign-currency reserves in euro terms jumped to 62.5 billion euros as of Jan. 31 from 59.2 billion euros a month earlier. That suggests policy makers further intensified interventions, selling about 50 billion koruna ($2.1 billion) in the market, according to estimates by Jakub Seidler, the chief economist at the Czech unit of ING Groep NV. The CNB will publish the January intervention data in March.

Serious Debate

The yield on five-year government bonds fell one basis point on Monday to minus 0.06 percent, the lowest in almost two months. The koruna gained 0.1 percent to 27.05 per euro as of 4:51 p.m. in Prague. It weakened 0.2 percent on Friday, the most in more than four months, after Vice Governor Vladimir Tomsik said that the central bank had a “serious” debate about negative interest rates at Thursday’s monetary policy session.

After the meeting, the central bank ruled out scrapping the currency cap in 2016, compared with previous guidance that it would end at around end-year. It said the exit from the regime was probable in the first half of 2017.

The monetary authority is coping with opposing economic forces, with cheap commodity prices balancing out the inflationary effects of an acceleration in economic growth. While rate setters have said they don’t have to align the exit from the unconventional policy regime, which they introduced in 2013, with the end of the ECB’s quantitative-easing program, developments in the the euro area are influencing policy deliberations in Prague.

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