Czech president calls again for central bank to end koruna cap

By bne IntelliNews August 12, 2015

bne IntelliNews -


Joined this time by the heads of both houses of parliament, Czech President Milos Zeman on August 11 called again on the central bank to dump its policy to keep the koruna weak.

“The central bank should re-evaluate its stance and avoid further interventions to weaken the koruna,” Senate Chairman Milan Stech said after meeting with Zeman and parliament speaker Jan Hamacek, CTK reports. “It hurts most Czech citizens,” he claimed.

The Czech National Bank (CNB) launched the policy in November 2013. The cap on the currency looks to have been successful in spurring economic growth and helping ward off deflation. The central bank has pledged to keep the koruna from gaining above 27 against the euro, although investors are currently testing its committment.

The three leaders are urging the CNB to ease the pace of the interventions and abandon the koruna cap, Stech said. “We completely agree on this. It can be said to a certain extent that we are calling on the bank board again to slow its intervention pace after all and not to stick to the CZK27/EUR level," he added.

Last month the CNB, which has depended on verbal intervention for the vast majority of the currency cap, was forced to intervene on the market for the first time since it introduced the policy. The country’s economic recovery, paired with the koruna's status as a safe haven through the Greek crisis, has spurred investors to test the regulator’s limits.

The CNB has said the regime helped to ward off deflation and reiterated last week that it will keep the cap in place until at least the second half of 2016. The Czech Republic is alone amongst the Visegrad Four in staving off deflation – albeit it has come very close and inflation remains unlikely to approach the CNB's 2% target for some time. 

Emerging from its longest-ever recession in 2014, the economy has been steadily recovering over the past couple of years, and recorded its best-ever quarterly growth in the first three months of 2015. The CNB recently increased its 2015 GDP forecast to 3.8% from the previous 2.6%.

However, Zeman – who is solely responsible for appointing members of the central bank’s seven-member board – has repeatedly criticised the forex interventions, calling the policy economically “inefficient”. He also claims it's a sneaky move by the board – all but one appointed by his euro-sceptic predecessor Vaclav Klaus – to keep adoption of the single currency at arm's length. 

Keen on the euro, the president has vowed to appoint central bankers who will “rectify” the policy. However, his one appointment thus far, long-time confidante Jiri Rusnok, appears to now support the cap.

The next appointments to the Czech rate-setting board are due in July 2016, when the terms of Governor Miroslav Singer and board member Kamil Janacek expire. Two more posts open up in 2017 for Zeman to fill before his own term ends in 2018.

Zeman's return to the topic after a pause of a couple of months will do little to alleviate the pressure on the koruna, which has been hovering just above the cap for weeks. However, the CNB reiterated early this month that forex is its preferred tool to keep policy loose, despite some speculation that it could move to negative rates from the current 0.05%, where the benchmark has stood for close to two years.

Analysts at RBS suggest that the CNB's determination – mixed with global pressures – will see the koruna in retreat soon. "The CNB is adamant that the EUR/CZK floor is here to stay, at least until H2 2016," they write. "Furthermore, the CNB has signalled that currency appreciation is a risk to its inflation target."

Noting the collapse in commodities and China's efforts to export deflation, they suggest the Czech currency could be set to weaken. "Given that EUR/CZK is virtually sitting on the CNB’s floor, we think that it is a good moment to position for slight koruna weakness in the coming months," the analysts sum up. 

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