Czech central bank governor says full impact of currency intervention too early to call

The Czech Republic´s top banker has gladly taken the praise awarded him by his international audience for the central bank's audacious foreign currency intervention to push the crown lower. But Czech National Bank governor Miroslav Singer admits assessments of the move will not really be possible until the impact on inflation becomes clearer.

Miroslav Singer, photo: CTK

Czech National Bank governor Miroslav Singer is basking in the limelight after being named the European Central Banker of the year by the Financial Times group monthly, The Banker.

Bankers and economists at the prestigious publication last week picked out Singer for his brave decision at the start of November to intervene directly on the currency markets by selling crowns and buying euros to push down the value of the local currency to a target of Kč 27/euro.

The foreign praise is a welcome change from the wave of domestic criticism that accompanied the intervention and announcement that the central bank will seek to maintain the low level of the crown for at least the rest of the year. Singer said in an interview with business daily Hospodářské Noviny on Monday that he feels the international banking and economic community can take a broader, and better, view of the macroeconomic picture and factors being juggled in the intervention decision than his local critics.

But the governor has admitted that the outcome of one major part of the currency intervention gamble - how far a lower crown will import inflation into the Czech economy by making imported goods more expensive - will not be clear until next month. He says February figures on local prices should give a clearer picture of the inflation trend than the confused signals coming out in January due to shops' sales promotions throughout the month.

As far as the intervention itself goes, the Czech currency has probably weakened over the last two months even more than Singer and his bank board colleagues could have hoped. For much of that time it has been hovering around Kč 27.5/euro and sometimes looked like it could even be heading toward Kč 28/euro. Before the currency intervention on November 7, the crown was around 5% stronger, bobbing around just below Kč 26/euro.

Singer said the currency's lower levels is indication that most economists and foreign observers back the central bank and believe there is little inflationary risk to the Czech economy from the weaker crown. The central bank believes inflation this year will be average around 1.3% this year, which would be the second lowest annual rate over the last decade.

Photo: Štěpánka Budková

The governor also defended the foreign currency intervention as the last weapon in the central bank's armory after all the other options to boost the economy were exhausted. Tinkering with interest rates was no longer possible since there were almost at zero and the market was expecting action not words after dramatic signs that the Czech economy could slip into recession. He said delayed action would have been even more abrupt and could have resulted in something more like the 20% fall of the Swiss frank than the smoother Czech descent. Singer is also promising that only dramatic economic developments will shift the bank from its Kč 27/euro target. What's more, he says there will be plenty of signals that the change is being considered so that companies can prepare.

Dropping the low exchange rate could happen when there are clear signs that economic growth is taking off in the Czech Republic and that firms are investing again. And as far as investment goes, a higher rather than lower crown is favorable for Czech companies because around 85% of the equipment and know-how they normally buy comes from abroad or is priced in foreign currencies. In the meantime, it's the exporters above all who can profit from the low crown as their goods are given a boost against foreign rivals.