Interview of Tomáš Holub, Bank Board member
By Krystof Chamonikolas (Bloomberg 18. 3. 2020)
The European Union’s biggest currency sell-off will be a boon for the Czech economy, allowing the central bank to avoid cutting interest rates all the way to the zero again in the wake of the coronavirus, a policy maker said. The Czechs followed the crash in oil prices, plus the plunge in global markets for riskier assets and the U.S. Federal Reserve’s emergency rate cut with a surprise half-a-point reduction of their own on Tuesday.
The koruna’s 8% plunge against the euro in one month will help exporters once the virus recedes, central bank board member Tomas Holub said in an interview. It will also allow the central bank to take a “less aggressive” reaction with rates, he said. “The exchange rate has already significantly relaxed monetary conditions,” Holub said by phone on Tuesday. “But with further aggressive policy easing, we could be sending the exchange rate to levels where it could have some undesirable side effects.”
Holub spoke a day after he and his colleagues reversed a tightening campaign of nine rate hikes since 2017. After cutting the benchmark to 1.75%, investors are betting on an additional 1.5 points of cuts, but Holub said those wagers are overdone, as such drastic easing could hurt the koruna so much that the central bank would be forced to intervene.
Other countries in central and eastern Europe are pursuing both fiscal and monetary stimulus to counteract vanishing economic activity as factories, shops, schools and most aspects of daily life are locked down in quarantine. Poland slashed rates by half a point on Wednesday, its first cut in five years. The Czechs are also sitting on a vast warchest of foreign reserves amassed around the end of its Swiss-style cap on koruna gains three years ago. At almost $150 billion, its one of the largest in the world as a share of economic output and exceeds the levels held by regional peers Poland and Hungary combined. The bank has pledged to step in and correct any koruna moves it deems as excessive.
“We regard the degree of exchange-rate depreciation so far as more or less natural and mostly desirable,” said Holub. “But if the currency sell-off were to go too far, this could start hurting parts of the economy, and then of course it would be worth considering whether we should step in.”
Holub said the Czech economy doesn’t need near-zero rates because it’s resilient, with the EU’s lowest unemployment and healthy public finances and banks. Cutting rates too much could weaken the koruna to levels that could weaken importers, consumers, and exporters hedged against koruna appreciation. “The fact that we coincidently cut rates immediately after the Fed doesn’t mean we want to somehow mechanically track it,” he said. “If this is how the market interprets things and why it expects Czech rates at zero, then I think it’s an overly simplified interpretation.”