The Czech central bank decided on Nov 7 to keep interest rates at record-low levels in line with analysts expectations but surprised the market by launching the first in more than a decade koruna sales to weaken the currency and bring inflation back to its target.
In a statement on its website the bank said it will intervene on the foreign exchange market to weaken the koruna and keep the exchange rate close to 27 per euro. As a result of the interventions, the koruna weakened 4.8% to 27 per euro, the lowest level since June 2009, Reuters reported citing data from traders.
After cutting its main two-week repo rate close to zero in November 2012, the bank has been considering currency interventions as a next tool to relax monetary conditions and help the fragile economy. At the previous two meetings in August and September, the bank’s board voted against the interventions as the majority of central bankers did not see a significant risk of deflation. But since then inflation, that has been running below the bank’s 2% target for months, eased to a 3.5 year low of 1% in September.
A weaker local currency will boost exports that account for some 80% of the country’s economic output, increase import prices and limit deflation risks. But a rise in prices due to the currency depreciation could hurt household consumption and in return weigh on the fragile economy that emerged from a record-long recession in Q2.
Central bank governor Miroslav Singer said the bank will continue intervening on the market once significant inflationary pressures emerge. The bank will announce intervention volumes in its regular monthly reports on foreign reserves. In a new forecast published later on Nov 7, the bank said it expects inflation to reach 2.2% in Q4, under its alternative scenario taking into account FX interventions.
The bank’s board voted on Nov 7 to keep the main two-week repo rate at 0.05% for the eighth straight meeting after cutting it down by 20 basis points in November. The Lombard rate that provides a ceiling for short-term interest rates on the money market was left at 0.25% and the discount rate that represents the floor for short-term money market interest rates was kept at 0.05%.
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