The exchange rate commitment: how the CNB keeps the exchange rate close to CZK 27 to the euro
- What is the CNB’s exchange rate commitment?
- How should the financial markets interpret the definition of the exchange rate commitment of "close to CZK 27/EUR"?
- How are interventions made in the foreign exchange market?
- Do the CNB’s interventions in the market require a special Bank Board decision?
- How come the CNB has unlimited possibilities to intervene on the market in order to weaken the koruna?
- Does the CNB use interventions in the foreign exchange market to defend a specific exchange rate level?
- Does the koruna trading below CZK 27.000 to the euro mean the CNB’s exchange rate commitment has been breached?
- How will the public be informed whether or not the CNB has been active in the market? Will the CNB provide information on any intervention activity during or at the end of each business day?
The koruna exchange rate commitment is not a new monetary policy objective, it is just the instrument we have been using to fulfil the inflation target since November 2013 instead of interest rates. At the decision of the CNB Bank Board, the CNB has pledged to “intervene where necessary in the foreign exchange market to weaken the koruna so as to maintain the exchange rate close to CZK 27 to the euro.” The CNB Bank Board has repeatedly confirmed this commitment, mostly recently at its latest monetary policy meeting.
The CNB regards the commitment as asymmetric, i.e. one-sided in the sense that it will not allow the koruna to appreciate to levels it would no longer be possible to interpret as “close to CZK 27/EUR”. This means the CNB will not allow the koruna to appreciate to levels it would no longer be possible to interpret as “close to CZK 27/EUR”. The CNB prevents such appreciation by means of automatic and potentially unlimited interventions, i.e. by selling koruna and buying foreign currency. On the weaker side of CZK 27/EUR – meaning at levels weaker than CZK 27 to the euro which the CNB does not assess as “close to CZK 27/EUR” taking account of the situation – the CNB is allowing the koruna exchange rate to float according to supply and demand on the foreign exchange market.
The central bank’s interventions in the foreign exchange market to weaken the Czech koruna involve buying foreign currency and selling koruna. Where necessary, i.e. if the koruna is being traded at levels incompatible with the CNB’s exchange rate commitment, a team of traders from the CNB’s Financial Markets Department automatically launches purchases of foreign currency in return for koruna. In this way, the CNB will defend the exchange rate from appreciating above levels that could no longer be interpreted as “close to CZK 27 to the euro”.
No, our interventions, where necessary, are automatic. The CNB may intervene for an unlimited period of time to defend its exchange rate commitment for the duration of the commitment and there is no limit on the amount of the purchases of foreign currency.
The CNB can use infinite amounts of koruna to purchase foreign currency, as it itself issues the Czech currency in both paper and electronic form. Where necessary, the CNB is resolved to intervene on the FX market in such volumes and for such duration as needed to reach the desired exchange rate level with the aim of fulfilling its inflation target in the future.
No, it does not. As we have said, the key thing for the CNB in terms of compliance with the commitment is not to allow the exchange rate of the koruna to appreciate to levels that could no longer be interpreted as “close to CZK 27 to the euro”.
No, as long as such trading is negligible in size and only short-term. The specific definition of “close to CZK 27 to the euro” is a matter of trading strategy which the CNB does not make public.
As in the past, the CNB will inform the public of its current financial market operations only when it considers this appropriate. Otherwise, the standard disclosure regime applies: the CNB publishes data on financial market operations in line with a predefined schedule which is published a year in advance – these data can be found in the calendar of published information (under CNB foreign exchange transactions). Any interventions would appear in the “Foreign exchange transactions” table (published with a two-month lag).
The CNB has never, in the past or since the exchange rate commitment was adopted in November 2013, pledged to provide information openly – and online – about every transaction it makes in the market. The exchange rate commitment was announced completely transparently and its parameters were described openly and publicly (including the fact that interventions in the market do not require a special decision of the Bank Board). This notwithstanding, the CNB has made no commitment to provide information about transactions made or about its active presence in the market every business day. The choice of trading strategy is an internal matter of the CNB, which, like other financial institutions, including other central banks, does not make this strategy public.