Czech central bank sits on hands as koruna weakens

By bne IntelliNews January 13, 2015

bne IntelliNews -


The Czech koruna is "the worst performing currency in the world" so far in 2015, as the market speculates the central bank could try to weaken it further to head off deflation. However, the Czech National Bank is likely to keep its intervention only verbal for the moment.

The koruna dropped 1.4% on January 12 to 28.517 per euro, the steepest drop since November and the weakest level since March 2009, according to Bloomberg data. However, it had recovered to 28.413 as of 10.30am local time on January 13. The currency has depreciated by around 2.7% since the start of the year, earning it a premature headline as the "world's worst currency" of 2015 in some quarters.

The retreat on January 12 came after the statistics office released disappointing November retail sales. That followed heavy pressure on the currency three days earlier, as Czech inflation was reported at just 0.1% in December, and a central bank official suggested low oil prices and imported deflation could yet force a rethink at the Czech National Bank. 

Usually stable to the point of boring, the Czech currency had withstood the pressure of the plummeting ruble in late 2014, as well as speculation over policy at the European Central Bank, better than most regional peers. However, weak economic indicators put it under the spotlight at the start of the new year. 

CNB deputy governor Vladimir Tomsik warned on January 7 that the economy is importing strong deflationary pressures from the Eurozone. The central bank might again be facing the problem of how to meet its 2% inflation target, stabilise inflation expectations, and support the domestic economy, he pointed out.

The CNB's unconventional policy has helped the country stave off the deflation seen in Visegrad peers Hungary and Poland in the second half of 2014, but bets are rising that the central bank could lower its verbal guideline on the koruna to 28 to the euro. 

The Czech central bank slashed interest rates to effectively zero in 2012. A year later it officially launched currency interventions - although it only made one relatively small actual move on the market - to keep the koruna weak in a bid to spur economic growth. The bank has pledged to keep the koruna from gaining above 27 against the euro. The policy has been a success, with the Czech Republic leading the region's economic recovery in the past year.

However, the recent results and comments have the market expecting more. Tomsik's comment prompted Societe Generale to recommend selling the koruna on expectations it will continue its drop to 28.75 per euro.

All eyes are now on a CNB meeting due on February 5. Yet despite the bets by the market, the CNB remains highly conservative. As they have for over a year, policymakers seem likely to restrict intervention to the verbal variety, and let the market do the spade work.

Until the deputy head's comments, a range of CNB officials have been trotted out to reject suggestions of further action. 

Late on January 12, former interim prime minister Jiri Rusnok came on watch. He insisted the central bank has no reason to further weaken the koruna because deflation is being generated by falling external commodity prices. 

In another interview, the CNB's Chief Economist Tomas Holub denied that a change in the EUR/CZK target would help solve anything. Earlier, he had suggested the CNB does not see a risk that lower oil prices will result in deflation, thanks to rising domestic demand.

"We are not surprised by such early response from CNB members; indeed, an official change in the EUR/CZK floor may not occur at all," suggest analysts at Commerzbank. "The market knows that a change in the exchange rate target is within the CB's ability, and a weaker exchange rate would be consistent with the changed inflation outlook; this realisation itself is enough to drive the EUR/CZK exchange rate up."

In fact, most analysts are convinced this is the stance in the short term at least. "Overall, for the time being we believe that CNB response will be keeping EUR/CZK floor for longer," writes Jaromir Sindel at Citigroup. KBC suggests the "koruna can remain under pressure till the February meeting of the CNB".

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