By Leoš Rousek (Dow Jones 17. 9. 2013)
The Czech central bank should only intervene to weaken the koruna if the U.S. Federal Reserve's plan to wind down its cash support for financial markets sharply increases the Czech currency's value, said Eva Zamrazilova, a rate-setter on the Czech National Bank's monetary policy board.
"Although I don't see (koruna appreciation) as a realistic scenario at the moment, I can't rule it out because I think we have to expect a period of higher volatility on financial markets," Ms. Zamrazilova said. "This will come along as large central banks end their non-standard policies."
International bond markets have been under pressure since May when the Fed first said it could soon begin tapering its monthly $85 billion worth of bond purchases that have pumped cheap cash into financial markets for over four years.
The move caused currencies to plunge in many of the emerging markets that have benefited from the increased liquidity offered by major central banks since the 2008 financial crisis. That hasn't been the case with the koruna, which has appreciated since 2009 as the Czech Republic's solid credit rating and strong fiscal position have made it something of a safe haven for investors.
At midday Tuesday the koruna stood at 25.75 against the euro, slightly firmer than the CNB's forecast of 25.8 for the current quarter.
In a mark of how sensitive markets are to quantitative easing issues, U.S. stocks rose Monday after Lawrence Summers withdrew from the race to succeed Ben Bernanke as Fed chairman. He was considered an opponent of cheap liquidity and investors feared he might reduce bond purchases more quickly than currently expected.
In the midst of a nearly two-year-long recession, the CNB slashed its headline interest rate to a record low 0.05% in November. The CNB said at the time that with rates now technically at zero its only remaining option was to sell koruna if adjusted inflation--which is relevant to monetary policy--remains below its 1%-3% target range. Inflation adjusted for effects of changes in value-added sales taxes slowed to 0.5% on the year in August from 0.7% a month earlier.
Intervention on foreign exchange markets would need the support of the central bank's seven-member policy board. At its August meeting the board voted against it without disclosing a breakdown of the vote. The CNB's last intervention was over 11 years ago.
In the absence of any immediate deflationary risks, Ms. Zamrazilova said: "I'd rather leave such instruments as a defense against any koruna firming unwarranted by (economic) fundamentals."
The Czech Republic's recovery prospects remain fragile so the central bank will likely keep rates at the current level for now.
Ms. Zamrazilova warned that weak domestic consumption could cause economic growth to undershoot the CNB's current target for next year. It expects the economy to contract 1.5% year-on-year in 2013 and to return to growth of up to 2.1% in 2014.
"I'm afraid that unless there's an increase in household expenditure, which accounts for about half of (gross domestic product), I would see (next year's) growth below 2%," she said.
Still, she said Czech rate-setters may take their cue for ending loose monetary policies from moves made by the Fed and other major central banks.
"Certainly we have to evaluate forward guidance set by the major central banks," Ms. Zamrazilova said. "Of course we have an independent monetary policy but we don't operate in a vacuum and we have to take into consideration interest-rate differentials."