CNB Governor Josef Tošovský on measures to cope with extraordinary inflow of foreign capital

At its regular meeting, the Bank Board discussed the CNB's recommendations for the eventuality of an extraordinary inflow of foreign capital into the Czech Republic. These recommendations are intended for the Ministry of Finance, and discussions on this topic with the Ministry have started already. CNB Governor Josef Tošovský sums up the central bank's standpoint as follows:

"The massive foreign capital inflow is linked primarily with the privatisation of state holdings in large firms. This extraordinary and, with respect to extent, unprecedented wave could have, under certain circumstances, two serious macroeconomic effects. The potential interest in the Czech currency associated with the financing of these purchases could result in undesirable appreciation of the koruna and adversely affect the prospects for economic recovery. In the longer term, there exists a risk of an excessive rise in domestic demand and thus another disturbance to macroeconomic balance. At present, the actual extent of both these risks is difficult to estimate, but recent experience has clearly shown that economic policy has to be prepared for them in advance.

"The CNB is therefore recommending that payments for privatised property be demanded in foreign currency, which should then be held on a special foreign currency account. Its use, i.e. later conversion into korunas, should be appropriately distributed over time so as not to trigger a shock wave in demand.

"This non-standard situation, namely the temporarily strong foreign capital inflow, requires to a certain extent non-standard solution. Monetary policy measures alone, i.e. interest rate changes and possibly foreign exchange interventions, may prove ineffective in comparison with the level and nature of the inflow of external funds. At the same time, the CNB Board believes that optimal fiscal and income policy will help significantly in dealing with the aforementioned potential risks."

CNB - Public Relations Division