Pain, Fire on Central Banker's Mind as Speculators Circle KorunaBy and
Rusnok prepares for central bank to drop limit on koruna gains
Bank has ‘high pain threshold’ for volatility after cap exit
Jiri Rusnok is no stranger to turbulence, and soon enough he’ll be put to a test again.
As Czech rate setters prepare to unshackle the country’s currency from an unconventional policy that’s prevented it from appreciating for three years, the soft-spoken governor of the central bank says its “pain threshold will be quite high.”
The only man to hold the top four economic jobs in the central European nation of 10.7 million, Rusnok, 58, has set a new tone at the monetary authority since being appointed last year. His predecessor, Miroslav Singer, often found himself defending the one-sided peg from domestic critics -- who said it made Czechs poorer -- and economists -- who said printing koruna to buy euros was a recipe for financial losses at the central bank.
Rusnok isn’t as easily provoked.
When it comes to criticism at home, “we will be prepared to endure this fire, and continue explaining the rational economic facts,” Rusnok said in an interview Wednesday at the central bank building in downtown Prague. “This policy has been demonized in a way how it is making the koruna undervalued versus some kind of ‘fair’ exchange rate. In our calculations, the koruna isn’t that far away from an equilibrium level.”
Investors’ anticipation of the return to standard monetary policy has only intensified since inflation accelerated faster than the central bank had predicted at the start of the year. With January’s price growth exceeding the central bank’s target of 2 percent for the first time in four years, policy makers were forced to boost foreign-currency purchases to keep the koruna from gaining beyond the imposed limit of around 27 per euro.
ING Groep NV estimates that the central bank bought foreign currencies worth about 19.5 billion euros ($20.6 billion) in the first two months of this year, exceeding the 16.9 billion-euro intervention volume for all of 2016.
Named to lead the Czech National Bank by President Milos Zeman last year, Rusnok also served as finance minister when Zeman was premier in 2002 and as economy minister in the government that followed. A Prague-trained economist from the Moravian coal-mining city of Ostrava, the future governor worked at state planning institutions before the 1989 fall of communism.
Rusnok was also briefly a lawmaker before leaving politics in 2003. He then became the chief executive officer of ING Groep NV’s Czech pension fund.
One of Rusnok’s biggest challenges came in 2013, when his long-time ally Zeman named him to lead an interim government after a prime minister was ousted in a corruption scandal. The president was accused of bypassing democratic norms in making the appointment because he didn’t give the ruling parties another chance to form a government, and Rusnok’s administration failed to win a confidence motion less than two months later.
Now the governor is ready to take his share of hard knocks again. While the bank can drop the cap as soon as next month, Rusnok said it was most likely to happen at around mid-year.
Pressure on the exchange-rate cap, visible in the currency-derivatives market, peaked in the first two weeks of the year, with the 12-month euro-koruna forward strengthening to as far as 26.5 on Jan. 11. The contract has since slipped back in a sign of investors paring bets on appreciation.
Consumer prices have been significantly influenced by the volatile cost of food as well as some one-time factors, and Rusnok said inflation reaching or even slightly exceeding the target isn’t an automatic trigger for a policy change. The bank wants to avoid a premature exit and needs to make sure it won’t need to go back to non-standard tools again, he said.
Investors hoping to make a quick profit when the cap falls, be warned:
“What we’re saying is that there can be high volatility, and that it will be a period when those speculating on the koruna should be a little afraid, more than we need to be,” Rusnok said.
— With assistance by Krystof Chamonikolas