Split Bank Board to Debate Koruna Sales Amid Zero Rates

A split Czech central bank board will debate whether to start selling the koruna as interest rates close to zero fail to end the longest recession since at least 1996.

The Ceska Narodni Banka is navigating in uncharted waters as it ponders its first currency intervention in a decade. A weaker koruna would help exports, which make up 80 percent of a $217 billion economy that’s shrunk for four quarters amid government austerity measures and the euro-area debt crisis. The bank will probably hold the main rate tomorrow at 0.05 percent, according to all 21 analysts in a Bloomberg survey.

Monetary authorities from U.K. to Japan are easing policy, fueling depreciation of their currencies. Governor Miroslav Singer has said the board tomorrow will debate whether to start koruna sales, while Mojmir Hampl, his deputy, sees no need for it now. The koruna has lost 4.6 percent to the euro since Sept. 17, a day before Singer first said the central bank may sell the currency.

“We don’t think the central bank is looking for devaluation, but rather, weakness at a moderated pace, which is what it has achieved over the past three months,” Mohammed Kazmi, a London-based analyst at Royal Bank of Scotland Plc, said in a March 20 interview. “The CNB has historically been ultra-conservative, which implies that the likely supply-side inflation that would follow an actual, and successful, intervention would be undesirable enough to restrain the CNB.”

Koruna Weakening

The koruna has had the fourth-worst performance among 25 emerging-market currencies tracked by Bloomberg since Sept. 17. The decline was outdone by the 14.6 percent fall in Japanese yen against the euro and matched by the British pound’s loss in that period.

The koruna has traded at 25.534 to the euro on average so far this year, in line with the central bank’s forecast for the first quarter. It was 0.1 percent stronger at 25.724 per euro as of 11:18 a.m. in Prague.

The Ceska Narodni Banka is “comfortable with the current monetary conditions,” Mai Doan, economist at Bank of America Merrill Lynch in London, said in a March 26 report to clients. “The board needs to see much stronger pressure for easing to embark on direct FX intervention.”

In the past month, several board members have voiced differing views on what policy setting is appropriate to meet the inflation goal. The forecast of the central bank, whose mandate is price stability, signals that currency sales may be needed in the second half of the year, Singer said in an Euro magazine interview published on March. 4.

Divided Board

His comments echoed Feb. 26 remarks by board member Lubomir Lizal, while Kamil Janacek was cited as telling Reuters March 19 that no intervention is needed as monetary conditions are relaxed enough to allow for a gradual economic recovery.

For Hampl, the Czech economy isn’t in danger of falling into a deflationary spiral now that would warrant koruna sales.

“For me personally, a trigger for interventions would be the moment when I see a highly probable risk of a long-lasting, devastating deflationary spiral,” Hampl in a March 18 interview. “I personally don’t see such a strong risk yet. It can’t be ruled out that this risk will appear in the future, but I don’t see it materializing for now.”

The seven-member board, which was split on monetary easing at five meetings last year, would have to approve the use of direct interventions as a policy tool, Singer said. The bank last sold the koruna to stem its appreciation in 2002.

Slowing Inflation

The Czech inflation rate dropped to 1.7 percent in February from 1.9 percent in January, which was below the central bank’s 2 percent target and an identical estimate for the month. Fourth-quarter gross domestic product shrank 0.2 percent from the previous three months, the fourth consecutive quarterly contraction.

The central bank in February cut its economic forecast for 2013 as the government’s austerity measures continue to damp demand. It projects 2013 GDP contracting 0.3 percent this year before growing 2.1 percent in 2014. The inflation rate is seen at 1.7 percent in the first and second quarters of next year.

Central banks in the region are cutting borrowing costs to foster economic growth. Hungary lowered its main interest rate yesterday to a record low of 5 percent. Poland has also cut its benchmark to a record, reducing it by a half-point to 3.25 percent on March 6.

‘Hawkish’ Comments

Hampl and Janacek’s comments were “hawkish” because they clashed with the central bank’s forecast, which assumes a “further, moderate decline in interest rates,” said Jaromir Sindel, an economist at Citigroup Inc. in Prague, by e-mail.

The koruna will ease further to 25.8 per euro in the second quarter, according to the median forecast in a Bloomberg survey of 23 analysts. That would be weaker than the central bank’s forecast of 25.3 per euro for the quarter.

“Recent comments by board members, Singer versus Hampl and Janacek, show a divided bank board,” Lubos Mokras, an analyst at Erste Group Bank AG’s unit Ceska Sporitelna AS, said in a March 25 e-mail. The board will “probably only repeat that the CNB is willing to help meet its inflation goal with foreign-exchange interventions if needed, and a vague commitment to keep low rates for a longer time.”

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