Negative Rates Could Help Czechs Shed Koruna Cap, Lizal Says

  • Czech central banker says sub-zero rates may help curb inflows
  • Investors scaling back bets on Czech rate cuts after ECB move

The Czech central bank may impose negative interest rates to fend off unwanted capital inflows around the time it scraps its cap on koruna gains, board member Lubomir Lizal told Hospodarske Noviny newspaper.

With the price of oil bottoming out and the Czech economy growing, policy makers in Prague are likely to end their Swiss-style pledge to prevent the exchange rate from strengthening beyond about 27 per euro around a year from now, Lizal, 46, said in an interview published by the newspaper on Wednesday. And that’s when sub-zero rates may become useful, he said.

“To me it’s a stability tool when we’re discontinuing the exchange-rate commitment,” Lizal told the newspaper. “The central bank can use it when it decides to stop weakening the koruna and at the same time it knows there’s a risk of excessively sharp appreciation.”

While several global central banks have embraced negative rates to spur inflation, policies are diverging across Europe after the single currency area’s monetary authority expanded its stimulus earlier this month. Hungary has cut borrowing costs, Denmark has kept its benchmark unchanged, and Romanian rate setters have said the European Central Bank move won’t deter them from policy tightening.

With the Czech benchmark at 0.05 percent, policy makers are debating whether they should follow the ECB into sub-zero territory. Lizal’s comments echo those of Jiri Rusnok, another board member and the top candidate to become the next governor, who said last week that negative rates could become an auxiliary tool to deter potential speculative inflows into the koruna.

Split Opinions

By contrast, Vice Governor Mojmir Hampl and the outgoing governor, Miroslav Singer, have been less enthusiastic about a rate cut, warning of risks to domestic lenders and saying the existing koruna cap is a better tool.

Investors in Czech bonds and interest-rate derivatives have scaled back bets on further relaxation of conditions after the ECB said on March 10 that it was done with rate cuts for now. Czech forward-rate agreements fixing future interest signaled market expectations of nine basis points of cuts by the end of this year on Wednesday, compared with 26 basis points of easing the day before the ECB decision.

Marek Drimal, senior economist at Komercni Banka AS in Prague, estimates that the probability of the central bank imposing a negative interest rate just before it scraps its exchange-rate pledge is about 40 percent.

“Such a rate cut would be designed to deter hot money trying to enter the market at the time of the exit,” he said by e-mail.

Economic Benefits

Lizal told Hospodarske Noviny that negative rates “aren’t on the table right now,” but if they are needed in the future the central bank shouldn’t shun the option just because this could hurt Czech lenders’ profits.

“It would obviously represent an expense for the financial industry,” he said. “Central banks always redistribute. Debating who’s going to lose out doesn’t make much sense while making monetary-policy decisions. I need to see the move benefits the economy as a whole.”

The newspaper conducted the interview with Lizal a week ago, Czech National Bank spokesman Tomas Zimmermann said by phone when contacted by Bloomberg News.

The Czech currency has been trading near the barrier, imposed in November 2013 to avert deflation, for about four months now. It stood at 27.04 per euro as of 2:03 p.m. in Prague.

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