Česká národní banka

Czech c.bank hawk almost ready to give in on FX moves

By Jana Mlčochová (Reuters 12.12.2012)

The Czech central bank's most ardent opponent of interest rate cuts signalled on Wednesday she could agree with foreign exchange interventions to weaken the crown and ease policy further, under certain conditions.

In an interview with Reuters, Eva Zamrazilova said she wanted to be sure a weaker crown would benefit exporters more than it would drive inflation higher before she agreed with what would be extraordinary steps for the bank to undermine the currency.

With its benchmark two-week repo rate already at the threshold of zero at 0.05 percent, the bank has said it can cut no lower and will act to weaken the crown against the euro if it decides to ease policy further.

But while analysts think the council on balance will end a decade of laissez-faire on the currency market that has served the Czechs well, they are less sure about how fast policymakers will actually agree on such a move.

Zamrazilova is seen by markets as an arch hawk on the seven-member policy board and even her conditional expression of support may suggest the consensus on the council has moved firmly behind intervention.

"I need to see a detailed analysis quantifying impacts of changes in the exchange rate on import prices, export prices, and the real economy," Zamrazilova said.

"I must be convinced that the pro-export benefit of interventions will outweigh the costs of an increase in import prices, which may... further dampen demand," she added.

The former commercial bank economist, appointed to the council by Eurosceptic President Vaclav Klaus, voted against the bank's three rate cuts this year, pointing to risks for the financial sector from very low interest rates and elevated global commodity prices.

The highly open central European economy has been contracting since July of last year as government austerity measures have put consumers on the defensive and export-reliant companies cut investments amid falling demand from the debt-laden euro zone.

Zamrazilova said in the interview a boost for the industrial sector from weakening the crown could help the entire economy.

"If analyses... show (FX interventions) will strengthen export output leading to growth in investment and wages, which will support domestic demand, and if this effect is more significant than the effect of the mere increase in import prices, then I will agree with interventions," she said.

But she also warned of the risk that weakening the currency would increase prices of food and energy so much that it would put an additional strain on demand, overriding benefits for exporters.

A November central bank forecast implied a negative two-week repo rate in most of 2013, and Governor Miroslav Singer has said that equated to the bank weakening the crown to ease policy.

Since then, data have shown the economy shrank by 1.3 percent year on year in the third quarter, worse than the 0.8 percent expected by the bank. November inflation slowed to 2.7 percent, compared to 3.0 percent expected by the bank.

Economists have responded by predicting policymakers could move the timing of interventions forward to the first quarter or possibly even the end of this year, rather than waiting until the middle of next year.

But Zamrazilova said moves to weaken the crown should wait until after inflation data in the first three month of the next year are known.

"If the present outlook for relatively low inflation in this period is confirmed, then it will be a point in favour of interventions. If prices of energy and food were higher than we assume now, then I would be more reserved regarding interventions."

That would show "the final bill" for consumers after an expected rise in energy prices, rent deregulation, and a further increase in the value added tax, she said.

"Until then, there is no sense in deploying interventions."