Česká národní banka


Interview of Vice-Governor Mojmír Hampl

By Peter Laca (Bloomberg 19. 1. 2017)

Czech Central Bank Vice Governor Sees No Rush to Remove FX Cap

Czech National Bank Vice Governor Mojmir Hampl sees no pressure to quickly remove the limit on currency appreciation despite accelerating inflation. Hampl spoke about the price outlook, transparency and koruna moves after the cap is removed in a Bloomberg News interview on Wednesday.

On the inflation picture:

“We’ve never said that just hitting the inflation target would mean an immediate removal of the foreign-exchange commitment.
We’ve always said we need to be sure that there is sustainable fulfillment of the inflation target over the medium-term horizon and that we have a very high degree of certainty that we won’t have to return to this non-standard policy.”
“An important point is that our prediction is based on the expectation that we will be actually overshooting the inflation target for a certain period of time. This overshooting is very much in line with the initial conditions under which the exchange-rate commitment was established.”

On koruna bets:

“I wouldn’t be absolutely sure that there is only one way in which the koruna FX rate can go after we leave the exchange rate commitment. I wouldn’t be surprised even by some currency depreciation. I’d expect a more volatile, bumpy road to a new equilibrium.”
“There is still our hypothesis of the missing counterparty.
We will have the euros, and if everybody is trying to buy the euros and exit from those koruna positions, who will be on the other side of the trade if it’s not the central bank? This is one market factor that everybody should be aware of.”
“Also, for instance investors holding government bonds would have to leave two markets -- the bond market and the FX market -- to close their positions. And that would be happening in a situation when the market is relatively shallow.”

On post-exit koruna management:

“We have standard tools. We can, of course, intervene whenever we believe the development is going against fundamentals and is going against the goal of price stability.”
“We’ve always had a managed-float regime. So, at times, it can be more managed than floating. Everybody should be prepared for that, because we will be ready to use our toolkit.”

On transparency:

“We have been as transparent as possible, always showing the market the potential timing of the exit. If it were to be a Swiss-style surprise, no one would have any chance whatsoever to be asking these questions.”
“The only change in the big picture is that now it’s more likely that the exit will be possible around the first half of this year, provided that macroeconomic developments are in line with our forecast.”
“The credo of this central bank has always been transparency, openness and the ability to prepare the real economy and the markets for what the central bank is likely to do.”
“From this perspective, you cannot compare our commitment with the Swiss commitment, because the regime we adopted was in some ways similar, but not all aspects were the same. Our approach was to communicate from the very beginning the possible timing of the exit and explain under what economic conditions we would be able to return to standard monetary tools.”

Balance sheet concerns:

“If there were any balance-sheet concerns on our side, I don’t believe that we would have even started the exchange-rate commitment. We have been communicating that there are no conditions on the side of the reserves or the size of the balance sheet, that would somehow limit our ability to credibly implement this type of full-fledged foreign-exchange commitment.”

Czech versus euro-zone inflation:

“If I were a market player, I wouldn’t only look at inflation here, but I would also look very closely at inflation in the euro zone. For example, the faster inflation here and the slower inflation in the euro zone, the closer you’re getting to the point where the theory is indicating that you can exit” the foreign-exchange commitment.
“And on the other hand, everybody should be aware of the fact that when euro-zone inflation started accelerating relatively rapidly in recent past, it should be more of a reason for us to exit later, not sooner. This is a big part of the question of timing.”
“So people should take this principle into account and understand that’s it’s not such a trivial matter of the exit happening immediately when the inflation target is reached.”
“At this point, data coming from the economy appear to be confirming the current forecast, which envisages the most likely moment for the exit in around mid-2017.”
“In probabilistic terms, I wouldn’t rule out that mid-2017 will stop being considered as the most likely moment for the exit, and that this most likely moment could move to the second half of the year.
“But as we are moving closer to the expected exit time, our language may seem a bit more ambiguous. For me, this would be caused by the nature of the situation because I simply will not know for certain what the exact date will be. This is the interplay between the hard and soft commitment, and I don’t think it would be possible to be even more transparent in this case.”


Czech Currency Speculators Warned of ‘Bumpy Road’ by Hampl

Investors hoping for a quick payoff on speculation of an early end to the Czech currency cap, be warned: it’s going to get choppy and officials won’t be rushed. That’s the message from central bank Vice Governor Mojmir Hampl, who sees no pressure to hasten the country’s biggest monetary reversal in more than three years and foresees a “bumpy road” ahead for anyone trying to bet on the matter.

“Data coming from the economy appear to be confirming the current forecast, which envisages the most likely moment for the exit in around mid-2017,” Hampl said in an interview on Wednesday. However, “I wouldn’t rule out that mid-2017 will stop being considered as the most likely moment for the exit, and that this most likely moment could move to the second half of the year,” he said.

While inflation has been accelerating faster than policy makers in Prague had anticipated, hitting their 2 percent goal in December, that’s not an automatic trigger for ending the Swiss-style currency cap, according to Hampl. Rising consumer prices in the euro area provide a reason against a quicker exit from the intervention regime, Hampl said, and also reaffirmed what the bank calls a “hard commitment” to keep the currency limit at least until the end of March.

Market Wagers

The Czech inflation spike at the end of last year has triggered increasing koruna purchases by investors betting the end of the currency cap is near. While the exact timing of scrapping the unconventional monetary stimulus isn’t yet known, quick koruna gains after the change are far from guaranteed and the central bank will seek to prevent excessive currency swings, according to Hampl.

“I wouldn’t be absolutely sure that there is only one way in which the koruna FX rate can go after we leave the exchange- rate commitment,” he said. “I wouldn’t be surprised even by some currency depreciation. I’d expect a more volatile, bumpy road to a new equilibrium.”

Bets on koruna appreciation are visible in the derivatives market, where twelve-month forwards dropped to as low as 26.51 per euro this month from 26.73 at the end of December. The spot- market exchange rate has been stuck near to the cap level of around 27 per euro for months, trading at 27.02 as of 1:08 p.m. in Prague, while the one-year forward contract rose as high as to 26.70 on Thursday.
Hampl rejected arguments aired by some analysts that accelerating euro-zone inflation could be a reason for quicker abolition of the unconventional policy. A key measure to watch is whether Czech consumer prices rose enough -- relative to the euro area -- to reflect the initial koruna depreciation versus the single currency after the cap was imposed in November 2013, he said. And that hasn’t happened yet, according to Hampl.

“Everybody should be aware of the fact that when euro-zone inflation started accelerating relatively rapidly in the recent past, it should be more of a reason for us to exit later, not sooner,” said Hampl. “This is a big part of the question of timing.”

While the Czech intervention regime was partly modeled on the Swiss cap example, the important difference is that policy makers in Prague have always signaled when they thought the currency shackles will eventually be removed, according to the vice governor.

“We have been as transparent as possible, always showing the market the potential timing of the exit,” he said. “If it was a Swiss-style surprise, no one would have any chance whatsoever to be asking these questions” about the outlook for the cap removal.

The central bank’s language may become slightly more ambiguous about the exit exact timing as it approaches the decision because the ultimate result of the board’s deliberations will be based on policy makers’ assessment of inflation trends and the price-growth outlook, Hampl said.

“For me, this would be caused by the nature of the situation because I simply will not know for certain what the exact date will be,” he said. “We’ve always said we need to be sure that there is sustainable fulfillment of the inflation target over the medium-term horizon and that we have a very high degree of certainty that we won’t have to return to this non- standard policy.”