Less Pressure on Koruna Cap Weakens Case for Negative Czech Rate

  • February intervention volume smallest in three months
  • Analysts say weaker demand for koruna persisted in March

The Czech central bank’s koruna sales fell to the lowest in three months in February, weakening the case for policy makers to impose negative interest rates to deter speculative capital inflows.

The central bank bought foreign currencies worth 623 million euros ($710 million), compared with 2.2 billion euros in January, as it continued to defend the limit on koruna gains set at around 27 against the euro, the regulator said on its website on Thursday. The intervention volume declined further to a “minimal” level in March, according to estimates from ING Groep NV economist Jakub Seidler in Prague.

Czech rate setters have been debating whether they need to mirror steps taken by some of their global counterparts and bring rates below zero to stimulate inflation. Board member Jiri Rusnok, who has been tapped to become central bank governor from July 1, said last month the bank would only use negative rates if it needs an additional tool to fight off “excessive” appreciation pressure on the koruna.

“The lower intervention volume suggests that the CNB at this moment doesn’t need to think too much about whether to introduce negative rates,” ING’s Seidler, a former analyst at the central bank, said by e-mail. “The question of negative rates would only become relevant if the CNB intervened for several consecutive months in volumes exceeding roughly 2 billion euros.”

As the koruna has moved close to the intervention threshold for five months, slightly weaker levels in February and March suggested declining demand from investors. The exchange rate stood at 27.025 as of 12:18 p.m. on Thursday.

While low intervention volumes are “good news” for the central bank, continued monetary easing the euro area may bring more appreciation pressure on the Czech currency in the coming months, said Radomir Jac, the chief economist at Generali Investments CEE.

“As long as the koruna isn’t under pressure, there is no need for the CNB to hurry up with inventing and introducing other non-standard monetary-policy steps,” Jac said. “But I think that the relative calm on the foreign-exchange market won’t last forever, and the koruna will test the level of 27 per euro again this year, which will prompt more interventions.”

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