Will the low crown go down in 2016?

The Czech economy was one of the fastest growing in Europe last year and, while it might catch a breath in 2016, wealth creation should still be strong. One of the major questions for both exporters and those targeting the domestic market is whether the central bank’s low crown policy will be cut short or prolonged.

Jan Bureš|Photo: Tomáš Adamec, Czech Radio

Czech GDP growth in the third quarter of the year came in at 4.3 percent, a figure putting the county out there in front among the fastest expanding European economies. And while a slowdown in spending of European funds might squeeze that growth in 2016, the solid trend is expected to continue this year.

This is the prediction of the chief economist of Era Poštovní Spořitelna, Jan Bureš:

“For the next year, I expect the economy to grow around 3.0 percent. The growth should mainly be based on domestic demand and less on exports, although I expect the exports to continue to grow.”

The economist points out that one side effect of the continued growth could be high investment by manufacturers in plant and improved processes, and with most of the equipment for that likely purchased abroad, that could dent the still strong Czech trade surplus.

Photo: Štěpánka Budková

One of the main questions for all Czech companies this year is whether the Czech National Bank will signal the end of its low crown policy or whether it will be prolonged into 2017. Just a reminder, the bank has set the target for the crown not to strengthen beyond 27 crowns/euro. The move was prompted by a bid to boost the local economy and head off the dangers of deflation, where prices look like they are set for a continuous slide and consumers postpone purchases and investments as a result.

It’s a fairly well established rule that any economic intervention has its winners and losers. The winner from the weak crown is overwhelmingly exporters who can grab a bigger share of foreign markets and cash in on bigger sales of their produce or services abroad. The losers are those who must purchase abroad with a weakened local currency.

The central bank originally expected to end the low crown policy in 2016, but the goal of sustained higher prices that would allow that has simply not happened. Inflation, helped by low oil prices, is stubbornly low. And with the European Central Bank pushing a cheap money, inflationary policy going the other way looks more complicated.

Miroslav Singer, photo: Filip Jandourek

But the board of the central bank is due for a fairly major change this year with the main architect of the low crown policy, bank governor Miroslav Singer stepping down half way through 2016. So will the low crown go down with him? This is what Jan Bureš has to say about the currency interventions used be the central bank to keep the crown’s appreciation under control:

“I believe it’s going to be difficult to end the intervention policy in 2016, although maybe the domestic fundamentals are strong enough for the abolition of the intervention regime.”

Even if the low crown policy does end, Bureš says the bank will keep a rein on any rapid strengthening of the local currency.