Česká národní banka


Tomsik Says Koruna Rally Curbs Need for Czech Rate Increase

By Krystof Chamonikolas (Bloomberg 19. 6. 2017)

Czech policy makers don’t need to rush with lifting interest rates from zero as a stronger koruna is already delivering part of the desired monetary tightening, central bank Vice Governor Vladimir Tomsik said.

Tomsik would consider keeping the benchmark rate at 0.05 percent for longer if the Czech currency maintains its strengthening trend that began after the removal of the Swiss- style limit on appreciation, he said in a June 15 interview in Prague. The monetary authority’s forecast from May signals the first increase in borrowings costs between July and September, but the vice governor said the move could be delayed until the final quarter.

“If the koruna keeps its current pace of appreciation, it’s appropriate to discuss shifting the start of rate hikes from the third quarter to the fourth,” Tomsik said. “For now, the exchange rate is doing a chunk of the work for us, so I can’t see any significant risk from a small postponement of rate hikes.”

Pondering the right moment for the first rate increase in nearly a decade, central bankers have said currency developments are the main source of uncertainty as they want to avoid cooling the economy too much after ending an unconventional stimulus in April. The koruna has rallied about 3 percent since the policy board scrapped the intervention regime that had held the exchange rate weaker than 27 per euro since 2013.

The monetary authority has said that a 1 percent exchange- rate appreciation delivers a similar tightening effect as a rate increase of a quarter of a percentage point.

“A bigger portion of the tightening could be delivered by the exchange rate rather than by interest rates,” Tomsik said.

The koruna erased an early loss of as much as 0.2 percent against to trade little changed at 26.186 per euro on Monday at of 2:23 p.m. in Prague. Forward-rate agreements showed investor expectations for the central bank’s benchmark rate to rise 19 basis points by March 2018, while pricing in almost no tightening over the next three months.

Tomsik said that while the exit from the non-standard policy regime has been “very smooth” and the risks to the inflation forecast are balanced, future exchange-rate moves remain hard to predict because of a large amount of bets on koruna gains made before the cap ended. Czech rate setters also have limited room to widen the nation’s rate premium over the euro area, according to the vice governor.

“For me, rather than increasing interest rates prematurely, it would be a much lesser evil to wait a bit and be certain that we won’t have to return to zero rates or even to the exchange- rate commitment,” he said. “Even if we slightly overstimulate the economy by waiting a bit with hikes, this wouldn’t pose a risk because inflation expectations have been well-anchored for a long time.”