Czech Policy Makers Clashed Over Koruna, Minutes Show

Czech policy makers clashed over the need for currency interventions, with the threat of deflation forcing the central bank to begin its first koruna sales in 11 years, minutes from the last monetary meeting showed.

While the central bank didn’t publish the breakdown of the vote, some board members argued that higher import prices caused by a weaker koruna would curb households’ purchasing power. Those supporting the interventions said that looser monetary conditions will help accelerate economic growth, according to the minutes published on the bank’s website today.

“It was also said that if the monetary conditions were not eased, the decline in prices would continue, the exchange rate would appreciate and the risk of sustained deflation would be entirely realistic,” the central bank said in the minutes, which don’t reveal individual opinions of board members.

The Ceska Narodni Banka in Prague started selling the koruna last week as inflation slowed below its target. After cutting interest rates to what the monetary authority calls a “technical zero” of 0.05 percent a year ago, central bankers needed an extra tool to ease policy as the economy struggled to gain traction after a record-long recession.

Data released after the Nov. 7 meeting show inflation slowed to 0.9 percent in October from a year earlier, dipping below the central bank’s target range for the first time in 3 1/2 years.

Unexpected Slump

The economy unexpectedly shrank in the third quarter, contracting 0.5 percent from the previous three months after growing for the first time in seven quarters in the April-June period, the statistics office said yesterday.

The koruna sank 4.4 percent to the euro after the bank announced the interventions on Nov. 7, the biggest-ever intraday drop. It traded 0.1 percent weaker at 27.139 per euro as of 11:53 a.m. in Prague today.

Central bank Governor Miroslav Singer pledged to keep selling the koruna in unlimited amounts “for as long as needed” to spur inflation, setting a target rate of “near” 27 per euro. Singer said the bank plans to keep the desired koruna level for at least 1 1/2 years.

Before making the decision last week, policy makers discussed concerns that exit from interventions may increase koruna volatility, the minutes showed.

Policy Exit

“In response to this, it was said that the use of the exchange rate could be discontinued only when it was very highly likely that there would be no need to return to it, and that it could be discontinued in such a way as to ensure that increased exchange rate volatility would not occur,” the bank said in the document released today.

At least one policy maker argued that the inflation slowdown was driven by a decline in regulated energy prices, which should have a positive impact on consumer purchasing power.

“It was also said that inflation expectations were still decently anchored, that monetary developments were not signaling any deflation risks, and that there were countries in Europe with lower inflation and higher rates,” the bank said.

Board members in favor of currency interventions said the bank needed to “react preventively and not wait until deflation occurred” to prevent a negative effect on economic output and employment, according to the minutes.

Before it's here, it's on the Bloomberg Terminal.