Czech central banker: economic outlook ‘pessimistic’ but coronavirus impact can be mitigated

Jiří Rusnok, photo: Filip Jandourek / Czech Radio

To counter the economic impact of the coronavirus, the Czech National Bank has twice this month cut interest rates, which now stand at 1 percent. But it has balked at quantitative easing – even though central bank governor Jiří Rusnok says the most pessimistic economic forecasts are the most realistic.

Jiří Rusnok, photo: Filip Jandourek / Czech Radio
The proverbial “rainy day” everyone it told to save up for it likely to be a prolonged, torrential downpour. Such is the forecast over the coming quarters, Jiří Rusnok told Czech Radio on Thursday, after the central bank cut its main rate a further 75 basis points.

“Everything indicates that the economic impact of the epidemic and the near halting of all economic life will be great … In any case, the most realistic scenarios are unfortunately the most pessimistic. They indicate that there will be a decline in economic growth of around 5 percentage points, perhaps more.”

The Czech Republic has a stable financial sector, no liquidity issues, and faces no imminent threat of a so-called deflation trap. But when banks’ client losses begin to show, lenders will need to use some capital reserves to cover credit losses.

So, apart from lowering the main interest rate, the central bank has reduced further the countercyclical capital buffer rate from 1.75 percent to 1 percent, effective from April. This should support lending activity of the Czech banking sector to the real economy.

“We are not naïve to think just lowering interest rates is enough to save the economy. It won’t stop the virus from spreading, reopen businesses or restore the free flow of cash on its own.

“We’re well aware of that which is why we took a decision to further lower the countercyclical reserves. … And that is something which will have an immediate effect, as of April 1. Banks will be able to freely use their reserves for their operations and lending.”

The central bank also has strongly recommended that commercial lenders, but also insurance companies and pension funds, postpone and dividend payments. Just in case.

But not on the table so far is quantitative easing, a form of unconventional monetary policy in which a central bank buys up government bonds and other financial assets to pump funds through the financial system, thereby encouraging commercial banks to use the extra funds to boost lending to households and businesses.

The Czech crown is now at about 27.23/Euro. The limited prospects of imminent quantitative easing (and even then, with a focus on financial stability goals) should support the Czech crown as the liquidity increase is unlikely to be material. Rusnok says the central bank has already set a threshold at which it would intervene in the currency market.

Meanwhile, the Finance Ministry on Wednesday and Thursday sold a record 123.9 billion crowns in bond and treasury bill auctions, as it ramps up borrowing to finance a budget deficit that has swelled from 40 billion crowns to 200 billion amid the coronavirus outbreak.