Czech central bank mixes words and action to keep crown below ceiling


The Czech National Bank has been forced to bring out its heavy weapon, in the form of currency interventions, in the last months to keep the crown below its ceiling. But lower inflationary pressure than expected now means that the speculators who bought up the currency on the hope of quick gains now appear to be quitting their crown positions. That means the pressure could be off the crown and the bank for the forseeable future.

Photo: Štěpánka Budková
In the world of central banks there are soft signals, such as subtle turns of phrase about future policy and perception of economic developments, and hard actions, such as foreign currency interventions. Properly used, the former can yield positive results at virtually no cost. Wrongly used, the latter can cost a small fortune.

At the moment the Czech national bank is understandably employing the first tool as much as it can to maintain the low crown strategy and only turning intervention as a last resort. How much it’s been pressed to make a last ditch defence of its core policy with interventions can be gauged in good part by outsiders from the state of the foreign exchange operations.

And analysts reckon that the Czech National Bank spent the equivalent of 4 billion euros on foreign currency interventions in July and August. With another spate of interventions coming in late August and early September, some estimate the total intervention over the last three months could have come to around 6 billion euros. The central bank releases figures after a delay, so accurate and immediate data are not to hand.

The Czech crown is believed to have been subject to a wave of speculation around a month ago with considerable purchases of the local currency on expectations that the low crown policy might be dropped sooner than expected.

Analysts reckon that the recent level of foreign currency intervention is not a great strain on the Czech National Bank. In any case, the central bank is reckoned to have eased the speculative pressure over the crown with the deployment of a few choice words this week.

Basically, the bank board said on Wednesday said it sees the main risks in the short-term as increased deflationary pressure, thanks in part to even lower oil prices than expected. This means that its August inflation forecast will have to be revised with the next inflation prognosis out in November.

And that scenario of a longer wait for inflation to stoke up to expected levels of 2.0 percent means that the low crown regime could stretch into 2017 and beyond and the pay off for the speculators holding crowns disappears into the distant horizon.

According to one analyst, the speculators who may have sunk as much as 180 billion on crown purchases since July, are now liquidating their positions. That would account for the current dip in the currency and should result in the upward pressure on the currency easing over the next weeks.