The Czech Central Bank has warned that it may extend its interventionist policy.This move, spurred by the European Central Bank’s latest measures to combat Eurozone deflation, would be intended to keep the koruna weak against the euro.
Early indications suggest that the currency cap could now endure well into 2016.
The Price of Eurozone Deflation in Prague
The Czech Central Bank has today announced its intention to extend its market intervention measures right through to the second half of 2016, and possibly throughout the full duration of this year and next.
The decision by the country’s government has been spurred by the latest measures of the European Central Bank, who are currently struggling to rein in Eurozone deflation.
Czech Central Bank Governor Miroslav Singer explained that this weakening of the Euro, combined with the continued fall of oil prices, has created an atmosphere defined by “unusually high levels of uncertainty”, which is adding increased downward pressure to Czech prices. As a result, the bank is now expecting deflation to hit as 2015 progresses.
A History of Involvement
This latest move by the Czech Central Bank follows on the heels of intervening measures affected at the close of 2013, when it became necessary for the bank to devalue the currency after previously setting its interest rates at almost zero.
This earlier action saw the bank invest over 7 billion euros in a single day, in an assault on the currency exchange market that saw the nation’s currency fall by more than 5 per cent against the euro. This act helped to stave off domestic deflation, succeeding in ending the country’s two-year long recession.
At the time of the move, the Czech Central Bank made a pledge, which their latest statement suggests they remain keen to uphold: that it wouldn’t allow the koruna to firm beyond 27 against the euro.
A Country Poised to Act
The Czech Central Bank’s current benchmark interest rate sits at 0.05 per cent, which makes it the loosest monetary policy east of the Eurozone. The Monetary Policy Board has been quick to announce that it will not move into negative interest rates as a result of the euro’s continued fall.
In order to stick to this policy, the only tool remaining to the Czech government is a further devaluation; a truth readily acknowledged by Mr Singer.
Mr Singer has stated: “The central bank is prepared to move the exchange rate commitment to a weaker level if there were to be a long-term increase in deflationary pressures capable of causing a slump in domestic demand, renewed risks of deflation in the Czech economy and a systematic decrease in inflation expectations.”
With many analysts agreeing that the country’s currency is too strong at its current levels, it seems that a further devaluation may well be on the horizon to save the koruna and brighten the fate of the Czech economy.