Czech Central Banker Says Negative Rates May Help End Koruna Capby and
Nidetzky sees sub-zero rates as way to keep speculators at bay
Policy makers won’t let koruna gain ‘too much’ after exit
Policy makers in Prague may introduce negative interest rates to discourage inflows into the koruna around the time they are ending their three-year-old limit on the exchange rate, a policy maker said.
As the Czech National Bank prepares to scrap its Swiss-style cap on the koruna next year, its main challenge is to avoid excessive currency gains that could choke nascent price growth and make the export-led economy less competitive. One way to dodge that risk is with a rate cut below zero from the current 0.05 percent that would make the koruna less attractive, board member Tomas Nidetzky said in an interview on Wednesday in London.
“We will definitely not let the koruna appreciate too much,” he said. “We could use negative interest rates just to avoid speculation. It is a possible tool that we can use just for the process of the termination of the foreign-currency interventions.”
After buying foreign currencies worth almost 30 billion euros ($31.4 billion) since November 2013 to prevent the koruna from gaining past 27 per euro, Czech policy makers are debating the timing and manner of ending the intervention regime that was designed to avoid deflation. Consumer price growth probably accelerated to 1.3 percent in November from 0.8 percent a month earlier, according to the median estimate of 13 economists polled by Bloomberg before Friday’s data release by the Czech Statistics Office.
The central bank expects inflation to reach its 2 percent target around the middle of next year. While this will be “a signal to stop interventions,” policy makers will have to weigh the impact of the stimulus provided at that time by global monetary authorities before letting the koruna float, according to Nidetzky. A premature exit from the cap could sap price growth and create a renewed need for a re-introduction of the intervention regime, he said.
Rate setters in Prague have said that while they will probably scrap the cap around the middle of 2017, an extended stimulus by the European Central Bank may make that move more difficult because of continued strong demand for the koruna. While the ECB on Thursday prolonged its quantitative-easing program until the end of 2017, it reduced the monthly asset purchases by a quarter to 60 billion euros.
“If inflation goes to 2 percent as we predicted, then we will consider also the decisions of the ECB, the Fed and the Bank of Japan,” Nidetzky said. “We have to be sure that 2 percent inflation is sustainable.”