Singer Damps Koruna-Sale Expectation With Czech Zero RatePeter Laca
The Czech central bank damped expectations it will sell the currency for the first time in a decade to battle a recession after policy makers kept interest rates at effectively zero for a second meeting.
The Ceska Narodni Banka, which targets inflation, left the two-week repurchase rate at 0.05 percent, almost three-quarters of a percentage point less than the euro-area benchmark. Further easing is “less urgent” because of a weaker koruna, Governor Miroslav Singer said, triggering the biggest currency gain in seven months.
“What we are looking at now is a sort of fine-tuning of the central bank’s communication with an aim to keep the koruna in a desired range,” Martin Lobotka, an analyst at Ceska Sporitelna AS in Prague, who predicted the bank would steer clear of announcing interventions yesterday, said by phone.
Czech households and businesses are spending less as government austerity programs and the euro area’s debt crisis, drag down the economy. Three rate cuts last year steered the central bank into uncharted territory, while several policy makers, including Singer, have indicated koruna sales as the next step if monetary conditions need to be relaxed further.
The central bank cut its economic forecasts for last year and 2013 as the government’s austerity measures damp demand. While the need for monetary-policy easing “may look less urgent,” the change is a result of conditions having “relaxed” due to the weaker koruna, Singer said.
Those comments spurred the Czech currency to reverse a 0.6 percent retreat, gaining as much as 1.1 percent, the steepest intraday advance since July 9. It traded 0.5 percent stronger at 25.221 per euro at 9:30 a.m. in Prague. The koruna was still down 2.8 percent since Sept. 17, a day before Singer first signaled the possibility of selling the unit to ease conditions.
“Intervention seems off the cards now,” Mohammed Kazmi, a strategist for emerging markets at Royal Bank of Scotland Group Plc in London, said in an e-mail. “With intervention prospects significantly reduced, we think that the currency can continue strengthening from here, reversing the losses observed over the last few months.”
Eastern European central banks are easing policy to boost their economies, weakened by their biggest trading partner, the crisis-stricken euro area. Poland lowered its main rate by a quarter-point yesterday to 3.75 percent, in line with the forecasts of all 34 economists surveyed by Bloomberg, while Hungary cut its benchmark rate for a sixth month to 5.5 percent on Jan 29.
The Czech economy shrank for a third three-month period from July to September, matching the longest quarterly declines recorded three years ago and in 1997. Gross domestic product contracted 0.2 percent in the final three months of 2012, according to the median forecast of nine economists in a Bloomberg survey.
The central bank cut its forecast for 2013 GDP to a 0.3 percent contraction from a previous estimate of 0.2 percent growth. The bank raised its outlook for the three-month Prague Interbank Offered Rate to 0.4 percent in 2013 from 0.2 percent.
The new forecast sees a “very moderate” appreciation of the koruna from current levels, Singer said.
Industrial output fell 12.5 percent in December from a year earlier, the worst reading in more than three years. The foreign-trade surplus shrank to 6.4 billion koruna ($336 million) in December from 33.5 billion koruna in November. Exports fell 7.1 percent, with imports declining 7 percent.
The inflation rate fell to 2.4 percent in December from 2.7 percent in November, below the central bank’s 2.8 percent estimate for the month. Monetary-policy inflation, calculated as price growth adjusted for changes in indirect taxes, slowed to 1.1 percent, above the 1 percent lower end of the target range.
The central bank will keep rates at “technical zero” until it sees a significant increase in inflation pressures, Vice-Governor Vladimir Tomsik said in January. Further monetary easing is possible through the “exchange-rate channel,” Tomsik and Martin Mandel, a professor at the Prague-based University of Economics, wrote in a Jan. 25 article for Bankovnictvi magazine.
Singer’s comment was a “misstep” in the central bank’s communication strategy and “will likely be rapidly reversed in the coming weeks,” Peter Attard Montalto, a strategist at Nomura International Plc in London, said in a report to clients. “There is room for first verbal and then real intervention to sustain euro-koruna higher -- certainly above 25.50.”