Central bank reaffirms plan to end currency intervention – but precise date still unknown

The Czech National Bank has reaffirmed that its currency intervention policy, launched in 2013 to keep a strong crown in check against the euro and to prevent deflation, is to continue for now – but will likely be phased out by the middle of this year. However, widespread uncertainly now exists over precisely when the interventions will end, with some speculating this could happen as soon as next week. Jan Bureš is chief economist at Patria Finance. I asked for his take on the central bank’s decision:

Jan Bureš|Photo: Tomáš Adamec, Czech Radio

“The Czech National Bank introduced the foreign exchange intervention regime at the end of 2013 to support inflation and growth. At the time it was afraid of a kind of deflation spiral. But the situation today looks very different. Growth is pretty robust, mostly driven by domestic factors, and we also see pretty solid inflationary pressure. This isn’t just imported from abroad, because we are also seeing domestically-driven inflation and accelerating wages. And this all means that the time has clearly come for the CNB to change its monetary policy stand – to tighten it a bit. And the first step before raising interest rates is to let the crown float again, and to return to a kind of managed floating exchange rate regime.”

So after its meeting on Thursday, the CNB Board decided to leave interest rates unchanged (at 0.05 percent). That was presumably expected.

“Yes, interest rates remain unchanged. And the first step before hiking them is going back to a managed floating exchange rate regime. So the decision was not at all surprising.”

The CNB intervention has been keeping the crown at a rate of around 27 crowns to the euro. Is it possible that if the intervention ends, the crown could again begin to strengthen, and that this could harm exporters?

“It is difficult to predict what will happen with the exchange rate when the intervention ends. The Czech crown has seen a very dramatic inflow of speculative capital over the last three months. Therefore, immediately after the exit from the regime – when the policy is either ended or unwound – one can imagine that it could cause pretty high volatility in both directions. We might even experience short-term losses for the Czech crown, despite the fact that the long-term fundamentals definitely point to a stronger crown.”