Czech central bank toughs out falling crown

Photo: Matěj Skalický

The Czech crown dropped from weak levels even further against the euro and dollar Monday. Some analysts see the Czech National Bank accepting the drop with a lower target exchange rate against the euro. But so far the bank is toughing out the slide and says no reaction is called for.

Photo: Matěj Skalický
How low can it go? That appears to be the most pertinent question at the moment regarding the value of the Czech crown against both the euro and dollar. The Czech currency slipped even further Monday, at one stage in the day trading at 28.5 crowns to the euro before recovering some ground to around 28.35 crowns. It hit a six year low against the euro and against the dollar it slipped to 23.99, a level not seen for the past nine years.

According to The Wall Street Journal, the Czech crown is the world’s worst performing currency against the dollar since the start of 2015 with a fall of 5.4 percent.

The crown’s drop has been sparked by a December annual inflation figure of just 0.1 percent, far adrift of the Czech National Bank target of 2.0 percent. That news was exacerbated Monday by poor retail sales figures for November. The bank does not expect the target inflation rate to be hit now until the start of 2016. And the prospect of a return of deflation, partly fuelled by falling oil prices, has stoked fears that the central bank could lower its target crown-euro exchange rate from the current 27 crowns to perhaps even 29 crowns.

The bank so far says that no such step is planned. The bank’s head of statistics and currency, Tomáš Holub, told Czech Television on Sunday that some positive effects could stem from increased domestic demand caused by low oil prices. In addition, there are no clear signs that deflation is menacing the Czech economy, he added.

The bank has taken no action so far to stem the crown’s fall. With benchmark interest rates at an almost insignificant 0.05 percent there is plenty of room to raise them but that would hurt still fragile growth. The bank could buy crowns against euros and dollars, but it probably reckons that course would look like desperation and might have a limited effect given the current sentiment against the crown.

Some analysts say the crown could easily ease to 29 or even 30 crowns against the euro. And most caution that there are probably more downsides from such a development than upsides caused by cheaper exports.

For one thing, a lower crown against the dollar will make oil and other imports more expensive. Czech exporters, some say, have already wrung maximum benefits from the lower crown over the past six months and are operating at near capacity. In that case, an even lower crown will not produce spark more exports and growth but could make some foreign components more costly and also delay investments in imported machine tools and other equipment needed for increased production.

The arguments will no doubt continue with the crown remaining weak and under pressure Tuesday and with all eyes turning to the forthcoming meetings of the central bank board.