Central bank governor steadies crown but doesn’t draw line under turbulence

The level of the crown has been a matter of public and political debate in the Czech Republic after it fell through the floor against the euro and dollar in recent days. Steadying words have firmed it a bit, but is it out of the turbulence?

Miroslav Singer, photo: Filip Jandourek

The Czech crown is not by any stretch of the imagination one of the most followed worldwide currencies.

But every currency perhaps has its day and the spotlight has most certainly been on the Czech crown over the last week as it has taken a pounding on the markets. It fell to around a six year low against the euro and was down to discount levels last seen nine years ago against the dollar.

The nadir for the crown came on Monday when it closed in Prague trading at 28.31 crowns to the euro, that’s around half a crown down from its lowest levels in previous weeks and a whopping gap between the 27 crown target that the Czech National Bank has set for the euro exchange rate.

A really low annual inflation figure for December of just 0.1 percent sparked fears that the central bank would be spooked into a new move to lower that target rate for the crown and fight off deflation. Deflation is perhaps one of the biggest evils on the books of central bankers, falling prices mean that consumers hold off on purchases and, in effect, the economy starts going into reverse.

But a few well chosen words, especially if you are the governor of the Czech National Bank Miroslav Singer can make all the difference. Singer intervened on the blogosphere late Tuesday saying that the bank sees no need to take any action to head off deflation, which he says was caused by temporary factors such as the low oil price and falling food costs. And his words reversed the crown’s fall and apparently calmed markets.

David Marek, photo: Šárka Ševčíková

So I asked Deloitte Czech Republic’s chief economist David Marek if the worst is now over for the crown. ‘It is hard to say because financial markets can move both ways unexpectedly. But economically there is no reason for the Czech currency to swing sharply. Now, I would expect that the situation could be a little bit calmer because there is no reason to expect that the Czech National Bank will change its policy.‘

Some economists have said the crown could be vulnerable to deeper falls to around 29 or even 30 crowns to the euro. Mr. Marek says he cannot rule that out, but he says that would solely be on the grounds of a speculative flight from the crown and similar currencies of other neighbouring countries such as Poland and Hungary which are perceived to be higher risk.

On Thursday, the crown was perhaps keeping everyone guessing after initially weakening to 28 crowns to the euro but then recouping some of the losses. So Czechs will still be wondering whether they should rush out and buy those electronic goods and holidays which are usually billed in the crown equivalent of the main foreign currencies.