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Czech Central Banker Backs Keeping Koruna Weak to Early 2016

August 25, 2014

ENP Newswire - 25 August 2014

Release date- 22082014 - Bank Undecided How to Exit Weak Currency Regime, Says Policy Maker Jiri Rusnok.

The newest policy maker at the Czech central bank said he backs the bank's policy of keeping the country's exchange rate weak at least through early 2016 to protect a fragile recovery, and sees no need to devalue the koruna further against the euro.

The comments by Jiri Rusnok, in an interview with The Wall Street Journal, suggest he is comfortable with the bank's ultralow interest rate policy and the ceiling it has set for the koruna's strongest value against the euro, despite signs that economy won't be recovering next year as vigorously as previously thought.

'The current exchange rate regime with the floor at 27 koruna against the euro is (here) to stay,' said Mr. Rusnok, who joined the seven-member rate-setting board in March after serving as the country's caretaker prime minister for seven months through January.

'There is nothing relevant which warrants-at least I see it that way-changing our view and I think that the (exchange rate) commitment level is adequate,' he said.

His remarks follow Governor Miroslav Singer's assertion in late July that further softening of inflation in Europe may prompt the bank to consider moving its exchange-rate pledge to a weaker level. Mr. Rusnok said that in his view, the risks of too-low inflation were less pronounced in late July than they were a few months earlier.

A weak currency typically boosts growth via higher exports, and adds to inflation through firmer prices for imported goods and services.

When official interest rates are near zero?as they are in the Czech Republic and many larger economies such as the U.S. and euro zone?the exchange rate becomes a powerful tool to manage the economy. Still, most large central banks avoid specific targets or ceilings for their currencies, allowing their values to be set in markets.

Last November, one year after keeping its headline interest rate at 0.05% amid the recessionary economy, the Czech central bank launched its EUR7.4 billion ($9.83 billion) currency intervention to thwart threats of deflation, a prolonged period of declining prices.

By weakening the koruna about 5% from pre-intervention levels, the bank also pledged to maintain the currency's exchange rate at above 27 koruna against the euro, effectively setting the firmest acceptable level for the currency.

The country's annual inflation rate has been stuck at just above zero since the start of the year and well below the midpoint of the bank's 1%-3% target corridor for more than two years.

The central bank expects prices to increase, fueled by the economic recovery, accelerating the inflation rate to 2% in the second half of 2015.

'The exchange rate commitment is doing its work,' Mr. Rusnok said.

Early Friday the koruna traded at 27.80 against the euro, weaker from 27.79 Thursday, but below Wednesday's 28.00, its weakest level since March 2009. But it is 1.46% higher compared with the central bank's forecast of 27.40 for the next few quarters.

The weaker koruna is to offset any disinflationary pressures due to a possible economic slowdown in Western Europe and the surplus of food products diverted to markets in the European Union after Russia banned imports of certain groceries, Mr. Rusnok said.

Moscow prohibited sales of Western foods in retaliation for the EU and U.S. sanctions against Russia for its alleged support of separatists in eastern Ukraine.

The koruna is unlikely to return to its firmer pre-intervention levels after the central bank abandons its weak-currency regime, Mr. Rusnok said.

'The overall price level has increased even though at a slower pace than we had expected but I don't see any reason for the koruna jump suddenly to get firmer,' he said.

Much will depend on how the bank ends its weak koruna policy. 'We haven't decided yet how we're going to do it but in theory we can either abandon the regime in one step with full transparency or we can do so gradually,' Mr. Rusnok said.

Battered by weakness in the euro zone, the Czech Republic's key export market, and suppressed consumer demand, the local economy contracted two years through the end of 2013, marking its longest recession since the late 1990s.

The economy is expected to grow 2.9% in 2014.

'However, I'm concerned about sustaining the growth momentum beyond this year,' Mr. Rusnok said, referring to the bank's recent downgrade of its growth forecast for 2015 to 3% from an earlier estimate of 3.3%.

'I can't rule out a possible downward revision of our (2015) forecast.'

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Source: ENP Newswire

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