Koruna Cap Seen Outliving Singer as Zeman’s Crusade Failing

The Czech central bank will stick with its weak-koruna policy for at least another year and a half, brushing off opposition from President Milos Zeman, according to a Bloomberg survey of analysts.

Rate setters won’t ditch their commitment to prevent the koruna from gaining beyond 27 per euro before October next year, according to 11 of 13 economists polled on Feb. 20-25, including five who see the policy extended until 2017. Two predicted an exit in the third quarter of 2016. The koruna gained 0.2 percent on Tuesday to 27.45 per euro by 11:43 a.m. in Prague.

The strength of the Czech National bank’s pledge has been in question after Zeman, 70, signaled two weeks ago he’ll appoint board members who oppose the measure. The bank said earlier in February the policy, designed to fight deflation risks, will be in place until at least July 2016, when its main advocate, Governor Miroslav Singer, is replaced after his final term ends.

“Concern that the president’s pressure might prompt policy makers to scrap the floor sooner is ungrounded,” Jakub Seidler, chief economist at ING Groep NV’s Prague-based unit, said by phone on March 2. “They are well aware that an early exit would damage the central bank’s credibility.”

‘Unnecessary Experiments’

The decision by policy makers in November 2013 to weaken the koruna with market interventions and impose the cap has been economically “inefficient” and was intended to delay euro adoption, after which the regulator will lose its power to conduct monetary policy, CTK news service quoted the president as saying on Feb. 18. When taking power a year ago, Prime Minister Bohuslav Sobotka said his cabinet won’t set a target date for joining the euro.

“I’ll do everything to ensure that this respectable institution is filled in the future with people who won’t do unnecessary experiments with the Czech economy and will support the Czech Republic’s entry into the euro zone,” Zeman said.

Singer said Feb. 19 that weakening the koruna has proved to be “necessary” because the Czech economy is still in a “highly deflationary environment” and that the cap may even be moved to a weaker level if needed. In a separate statement on the CNB’s website on Monday, the governor said that joining the euro won’t give the Czech economy any additional stimulus.

Only two of the analysts surveyed by Bloomberg see the cap shifted to a weaker level.

Zeman’s Appointments

Besides Singer, Zeman is scheduled to choose another banker for the seven-member board in July 2016 and two more by the end of his first term as president in 2018. His statement on Feb. 18 roiled the market, with the koruna gaining 1.2 percent that day, the most in more than three years, to 27.25 per euro.

The exchange rate has since slid back to about 27.5 as analysts from Nomura Holdings Inc. to Royal Bank of Scotland Group Plc said the market reaction to the president’s comments was excessive and the central bank was ready to defend the cap with interventions.

Consumer-price growth slowed to 0.1 percent from a year earlier in January, compared with 0.7 percent in October and the central bank’s inflation target of 2 percent. Policy makers have said the country may experience temporary deflation this year caused by falling oil prices.

‘Staunch Opponents’

“Zeman’s criticism of the CNB’s exchange-rate policy may backfire and bolster the case for keeping the koruna cap in place for longer, perhaps indefinitely,” Michal Dybula, a Warsaw-based strategist at BNP Paribas SA, said in a research note on Feb. 25. “We do not think the Czech Republic will move to adopt the euro soon, but any attempts to do so would be consistent with a managed and weaker koruna exchange rate.”

Board member Jiri Rusnok, 54, is an “excellent” candidate to replace Singer next year, Zeman said in an interview on Feb. 20. The former pension-fund executive and an interim prime minister appointed by Zeman in July 2013 for six months has repeatedly backed the weak-koruna policy.

While Rusnok may oppose weakening the koruna further, he is unlikely to seek a premature removal of the currency regime, according to ING’s Seidler, who predict that the policy won’t be scrapped until the fourth quarter of 2016.

“Rusnok is a pragmatist who won’t jeopardize the central bank’s ability to meet its inflation target,” Seidler said. “Even if Zeman appointed two staunch opponents of the currency policy next July, they would most likely still be outvoted.”

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