Česká národní banka

Wary on sub-zero rates, Czech central bank governor boasts "infinite" firepower

By Marc Jones (Reuters 21. 3. 2016)

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The Czech central bank has an "infinite" balance sheet with which to prevent its currency overheating, its governor said on Monday, ruling out a shock Swiss-style exit from the crown's exchange rate cap. Czech rates have been near zero since 2012 and for the last three years the central bank been holding the crown below 27 per euro to ease monetary policy further, and help inflation recover to the bank’s 2 percent target.

It became the first emerging market with negative bond yields and analysts are debating, with the European Central Bank (ECB) having just cut interest rates deeper into negative territory, whether the Czech Republic will take the plunge too."I think we may legally and technically use negative rates but we would rather avoid it for many reasons," central bank governor Miroslav Singer said in an interview.

"Uncertain investors are not too eager investors so that is why we are relatively reluctant. We may be forced to by the ECB and others but so far it doesn't appear so." Singer declined to say under what conditions rates could go negative, other than if policymakers felt the gap between Czech and ECB rates was getting too stretched.

"That would probably be a reason to react, but so far it is obvious we didn't do it, so it's obvious we didn't find it necessary," he said. Meanwhile, the alternative to negative rates was simple, he said: to keep defending the crown's exchange rate cap.

"We keep the floor," Singer said, reiterating it would stay in place into the first half of 2017. "We intervene when there is a demand to buy Czech crown and that pushes liquidity into the system, which itself generates negative interest rates de facto on hot money." "We have in principle an infinite balance sheet. We generate money by clicking on a computer."

Eventually removing the currency cap remains the trickiest hurdle for the Czech central bank, although with Singer set to leave the bank when his term finishes in June, it is a task that would fall to his likely successor Jiri Rusnok. The removal of a similar exchange rate cap regime ended in spectacular fashion in Switzerland in 2015, when the Swiss National Bank (SNB) unexpectedly scrapped the franc-euro cap, causing it to spike sharply and rocking global markets.

Singer said this would not be repeated in the Czech Republic for one key reason: unlike the SNB, the Czech central bank does not need to limit its losses. "In a sense, the Swiss could have defended the floor if they had wished, but at the expense of high potential loss," he said, referring to regional cantonal governments which are shareholders of the SNB. "This is not a concern that worries us... We have been living with negative equity for the last 10-15 years with no problems."