Some Czech Policy Makers See Likely Need for Koruna Intervention

Some Czech policy makers see an increased likelihood that the central bank will need to sell the koruna to ease monetary conditions, minutes from the bank’s May 2 policy meeting showed today.

The Ceska Narodni Banka left the benchmark two-week repurchase rate at 0.05 percent for a fourth meeting last week. After three rate cuts last year exhausted the scope for further reductions, rate setters are debating whether to sell the koruna for the first time in more than a decade.

“Several members of the bank board expressed an opinion that, in light of new data, the likelihood of need for further monetary easing through foreign-exchange interventions has increased,” according to the minutes, published today on the central bank’s website. The board agreed that “the risk of deflation isn’t visible.”

The $217 billion economy has contracted for five consecutive quarters, the longest streak since records began in 1996, as households and businesses spend less because of government austerity policies and Europe’s debt crisis. A weaker exchange rate would boost exports that account for about 80 percent of economic output, increase import prices and limit deflation risks.

The koruna is currently weaker than the central bank’s forecast, which is already easing monetary conditions, and low domestic economic activity is a reason for more currency depreciation, at least one policy maker said, according to the minutes.

Most members of the bank board agreed that the economy isn’t showing signs of a recovery in the near future.

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