Czech Central Bank Sees Koruna Intervention More ProbablePeter Laca and Krystof Chamonikolas
The Czech central bank left interest rates near zero for a fifth meeting and said the probability of selling the koruna is rising with inflation stuck below its target. The currency weakened to a one-month low.
The Ceska Narodni Banka kept the benchmark interest rate at what it calls a “technical zero” of 0.05 percent, almost half a point below the European Central Bank’s main rate, in line with the forecasts of all 21 analysts in a Bloomberg survey. The bank sees disinflationary risks that are pointing to a need for looser monetary conditions than currently assumed in its forecast, Governor Miroslav Singer said today.
“The probability that we will intervene has clearly increased under existing conditions,” Singer told reporters in Prague. “We haven’t reached agreement on this step so far,” he said, declining to comment on individual board members’ views.
The bank is in uncharted territory after reducing rates three times last year in reaction to a recession. The $217 billion economy shrank for six consecutive quarters through March, its longest contraction on record. With households and businesses curbing spending, the central bank began pondering in 2012 whether the first currency intervention in a decade is needed to help meet its 2 percent inflation target.
After the bank exhausted room for interest-rate cuts, the koruna assumed the central role in policy plans as its depreciation helps boost competitiveness of exports and makes imports more expensive, limiting deflation risks.
The Czech currency weakened 0.7 percent after Singer’s comments to 26.091 per euro as of 5:01 p.m. in Prague. It has lost 6 percent against the euro since Sept. 17, the day before Singer first said the bank may sell the currency to meet its inflation goal.
The central bank will keep rates at the current level for a “longer horizon” as it sees no material risks of increasing inflationary pressures, Singer said.
“I know for sure that if we go for intervention, we will not be buying foreign currency for a few koruna,” Singer said. “We will be buying foreign currency in bigger amounts.”
Consumer prices grew 1.3 percent from a year earlier in May, the slowest pace in almost three years. That compared with the central bank’s estimate of 1.6 percent.
Inflation relevant for monetary policy, defined as price growth adjusted for changes in indirect taxes, was 0.6 percent in May, below the 1 percent to 3 percent target band.
“The central bank keeps pushing its ultra-relaxed monetary policy into a more defensive position,” Helena Horska, head of research at Raiffeisenbank AS in Prague, said. “The governor’s words didn’t sound very optimistic.”
While central banks across eastern Europe have been trimming borrowing costs to help revive their economies, indications that the U.S. Federal Reserve may wind down stimulus have triggered a selloff in emerging-market assets and made some policy makers warier to ease further.
Poland should avoid cutting rates in July as the risk of weakening the zloty and sparking capital outflows outweighs any economic benefit, central banker Andrzej Kazmierczak said June 21 in an interview. Hungarian policy makers pledged “increased caution” after recent market turmoil even as they lowered their main rate to a record-low 4.25 percent on June 25.
For the Czech monetary authority, the impact of the Fed’s action isn’t the most crucial factor in its considerations.
“The Fed is one factor that we take into account in our decision, but very far from being even one of the top five most decisive factors,” Singer said.
The Czech economy contracted 2.2 percent from a year earlier in the first quarter as the longest recession since records began in 1996 extended further. Even as the slump deepened, the GDP data showed some signs of improvement as household spending rebounded.
“Policy makers seem to have been spooked by the weakness of inflation data,” William Jackson, an analyst at Capital Economics Ltd., said by e-mail. “There’s a window of opportunity until around October, in which inflation will continue to slow and, for now, we think it’s more likely than not that policy makers will conduct foreign-exchange purchases during this period.”