CEIC News@lert: A Look at the Unconventional Measures of the Czech Central Bank

August 20, 2014 HIGHLIGHTS The Czech National Bank (CNB) has long been trying to boost low inflation in order to reach its target of 2% per annum. Measures undertaken included a sharp decrease of its policy interest rates to unprecedented low levels - a common policy measure introduced by most central banks that has had little effect across much of the stagnating European Union. The latest move by the CNB, initiated at the end of 2013, involved targeting the exchange rate by intervening in the foreign exchange markets to keep the Czech koruna weak against the euro at levels above CZK 27/EUR. On July 31st, the CNB declared it would keep interest rates unchanged. The two-week repo rate is thus currently maintained at 0.05% pa, the discount rate at 0.05% pa and the Lombard rate at 0.25% pa. That marks a logical step given the fact that the inflation rate remains low and only bounced back to 0.49% year on year in July after plummeting to 0% in June 2014. A bolder move is the commitment the central bank officials expressed in continuing the policy of exchange rate targeting until the second quarter of 2015. These policies represent an attempt by the CNB to boost exports, increase import prices and fuel inflation. The Results The foreign exchange intervention started in November 2013 and the koruna increased from CZK 25.72/EUR to CZK 27.39/EUR. Since then, the exchange rate has been firmly kept above the target and in July 2014 it stood at CZK 27.57/EUR. Inflation is low and still hasn’t been fuelled by the expansionary monetary policy. Expectations are that the target of 2% will be reached in 2015, which justifies the planned horizon of the exchange rate intervention programme. Seasonally-adjusted exports, on the other hand, immediately responded to the depreciation and increased by 11.5% in November 2013 compared to the same month of the previous year. The boost to exports has continued through 2014 and in June the seasonally-adjusted trade balance reached CZK 36 billion, a rise of 36.4% on an annual basis. The Means Intervention in the currency market to weaken the koruna has led to accumulation of foreign exchange reserves, comprised of foreign currency and other assets, such as derivatives, banknotes and collateral. In November 2013 foreign exchange reserves increased by USD 8.2 billion within a month, while the koruna depreciated by 6.5%. Since then the reserves have been steadily accumulating as the central bank ensures the target of keeping the currency above CZK 27/EUR is maintained. The increasing amount of FX reserves is also equivalent to 4.5 months of imports as of June 2014. After a small decrease in May 2014 the foreign currency reserves bounced up again in June. The slight fall was backed up by an increase in other official reserve assets, such as banknotes and collateral held in reverse repos. The FX reserves have remained relatively stable even after another small decrease in July this year to USD 55.2 billion. However, the CNB must be cautious with this rate of accumulation of foreign exchange reserves since the practice exposes the central bank to potential valuation losses should there be large currency depreciation in major anchor currencies within the reserves composition. Discuss this post and many other topics in our LinkedIn Group (you must be a LinkedIn member to participate). Request a Free Trial Subscription. Back to Blog
27th August 2014 CEIC News@lert: A Look at the Unconventional Measures of the Czech Central Bank