Currency intervention unlikely

The country's most powerful banker has indicated he would not set a target rate for the Czech crown if he needed to weaken the currency, but a number of leading economists doubt whether any official intervention is likely in the near term.

In recent months, Czech National Bank (ČNB) Governor Miroslav Singer and his fellow board members have been laying the ground work for possible foreign exchange intervention to depreciate the currency, in a bid to help drag the country out of recession.

At a gathering in Vienna in January, Singer said if the central bank needed to weaken the crown for the first time in a decade, it would not set a target rate for it.

"We won't announce a fixed [desired] exchange rate," Singer told the panel at the Euromoney economic conference.

He said any model he puts forward would probably not resemble what has happened in Switzerland, a country that sets ceilings on how far its currency can strengthen against the euro.

"It's very unlikely that I'd suggest going in line with what the Swiss did," Singer said. "In the longer term, we're still a converging country, so we can't expect a stable exchange rate."

More likely, he said, is something like what has occurred in Singapore, which sets a fluctuation range.

"We'll decide from meeting to meeting what we recommend to our traders for each and every period," Singer said, without revealing whether the recommendation would serve as a desired exchange rate level for the crown.

In a recent interview with the weekly magazine Týden, Singer said the bank had sufficient funds to prevent any undesired firming of the crown and added that "a central bank has unlimited power to weaken its own currency." The governor added it was "certainly possible" the ČNB could intervene at any time before the end of June, and the costs of such interventions should not be an issue.

But Jan Vejmělek, the chief economist and head of economic & strategy research with Komerční banka (KB), does not think currency intervention by the ČNB is imminent.

"Direct intervention by the central bank against the domestic currency could be triggered by a risk of deflation if the exchange rate doesn't already reflect this. However, on a one-year horizon, we see a stronger domestic currency (compared with our main scenario) as the bigger risk," Vejmělek wrote in KB's latest economic outlook.

"This could happen especially if an earlier-than-expected or aggressive exit from the present recession were to be led by a recovery in external demand [probably from Germany] or in domestic demand," he added.

According to KB, any currency intervention would push the foreign exchange rate "significantly above" the level of 26.00 Kč to the euro.

Česká spořitelna analyst Martin Lobotka agreed a central bank intervention is unlikely because the ČNB has already done what it could by lowering official interest rates, and "its hands are pretty tied now."

In November, the ČNB cut its base two-week repurchase agreement rate to the minimum possible level of 0.05 percent, an all-time low.

"They obviously don't want to look powerless [hence incessant talk about foreign exchange interventions], but the stark truth is that they don't have strong tools anymore, unless you want to go to the extremity of, say, distributing a money-like instrument directly to public," Lobotka told The Prague Post.  "Let's make this clear: Foreign exchange interventions will help somewhat, but they're unlikely to make the difference between 0 percent growth and 2 percent growth."

Singer insists the central bank also opposes using any alternative channels for its policy making other than interest rates and the crown exchange rate. "It's better to have one tool than to engage in the use of many tools and give a confusing message," he said.

According to William Jackson, an emerging markets economist at Capital Economics in London, the probability of actual foreign exchange intervention is rising because of recent gloomy Czech economic data.

In January, figures on inflation, producer prices, industrial output, retail sales and unemployment all came in weaker than expected.

The purchasing managers index, a gauge of future manufacturing activity, also showed a surprisingly negative reading of 46 points, indicating contraction ahead.

The next official decision on currency movement from the ČNB is expected when the board holds its first monetary meeting of the year Feb. 8.

As the central bank grapples with the future direction of the currency, President-elect Miloš Zeman indicated before the final poll he would appoint Jiří Rusnok, Jan Švejnar and a labor-union economist to the ČNB board.

His rival Karel Schwarzenberg had declined to say whom he would have nominated for the central bank but promised to consult with figures such as Zdeněk Tůma, Pavel Kysilka, Luděk Niedermayer, Miroslav Zámečník, the prime minister and the finance minister.

Andrew Greene can be reached at
agreene@praguepost.com