ČNB: Forget about further strengthening of crown

The Czech National Bank (ČNB) has launched an unusually fullthroated defence of its recent intervention to weaken the crown. The measures, which towards the end of last week had the effect of immediately causing a drop of one full crown against the euro, led to a wave of harsh criticism.

Last week, two members of the bank’s board were made available to defend the move. The ČNB even went so far as to publish a handbook entitled “Myths surrounding the ČNB intervention” in which all concerns surrounding the move were methodically dismissed. The central bank instead claims that the intervention is creating a climate of perpetual certainty for the future: the exchange rate will not slip below CZK 27 to the euro.

The materials suggest Czechs should forget about a euro-crown convergence of the kind they have become used to in recent years. The ČNB is insisting the crown will now remain weak over the long term – and that wages will conform to this new reality.

“It is clear that by ‘longterm’, the ČNB does not mean several weeks or months, but rather several quarters or even years,” wrote the report’s authors Tomáš Holub and Petr Král. “The rate CZK 27/EUR 1 thus increases certainly about future exchange rate developments in a highly unusual manner. At the end of the intervention, rates will not return to their previous levels, because in the meantime price and wage levels will have adjusted to the new nominal levels.”

ČNB Deputy Governor Mojmír Hampl subsequently stated that although the intervention will create a short-term negative reaction, over the long term it will stabilise the country’s economic situation.
Hampl said he was persuaded that this stabilisation would be achieved, for example, by the central bank indicating what the crown exchange rate would be.

The public’s negative reaction to the intervention apparently did not surprise him, but he was surprised by the negative reaction of economists. “I’m mainly referring to those who regularly come to meetings with analysts we organise at the central bank. A potential currency intervention is a topic that has been discussed for a long time,” Hampl said at the Business Breakfast, organised by the weekly Euro.

Another central bank board member, Kamil Janáček, conceded to Reuters news agency that decisions such as the intervention are never accepted unanimously. He repeated the line that there was a real threat of defl ation and that the intervention’s impact would show up in January’s figures.

The aggressiveness of the intervention, which will see the price of the majority of imported goods leap several percent, thus decreasing households’ buying power, and which will push up the input prices of many entrepreneurs, was criticised by union leaders, economists and politicians, including ex-President Václav Klaus and President Miloš Zeman. Even the exporters, who are supposed to profi t from the weakened currency through enhanced competitiveness abroad, were not universally enthusiastic.

In defending the intervention, the ČNB stated that falling prices are not always an entirely good thing for households. Explaining its reasoning, the central bank said: “In the first phase of falling prices, people really can buy more. Nevertheless, if the situation continues for a long period, people can lose their income and subsequently their savings as well. In a defl ation spiral, the economy goes into decline, meaning companies must lay off workers or decrease wages.”