Research (Investicniweb.cz)
Currencies  |  September 21, 2012 12:35:26

Quantitative easing Czechia or how to sink the Czech crown



CNB Governor Miroslav Singer in an interview Tuesday DNES commented significant real economy and other possible future changes in monetary policy CNB. He said that "with such a low rate can not be the subject of another non-standard measures not talk" and that the CNB has certain additional measures to help the economy. Mentioned classical quantitative easing at the long end of the curve (following the Fed or the Bank of England), the extension class of asset being purchased, expand or change the rules of collateral in repo operations, negative rates, verbal promises (not to increase rates for a longer period of time - as in the U.S.) expectations of improvement in the economy and (marginally) foreign exchange interventions. (SOURCE: MS)

Singer's reasoning stems from one thing: The Czech economy is already in recession four quarters and domestic demand, in particular the consumer, is extremely weak. Domestic demand in the first half had dropped by more than 3%, although the economic reality so far is not bad. Certainly play a role extremely pessimistic households (their pessimism is the highest since 1999), a sluggish job market and a decline in real wages, but not so big you can not fall in household consumption in the first half of 2012 to explain.

To a certain extent it can participate in the savings rate (however, according to the provisional data has not improved much) or individual imports from abroad, but it quantifies the difficulty. Anyways, the weakness is really surprising.

Consumer sentiment and demand in the Czech Republic

What Governor Singer mentioned options mean, what is their likelihood and their potential impact?

First Quantitative easing, either unsterilized or something in the style used by the Fed Operation Twist In this case, the CNB for the newly created money buying bonds to try to lower their income in order to reduce long-term rates in the real economy.This measure would be in the Czech Republic probably not big impact - the banks have excess liquidity aggregate (for CNB consistently holds about 400 billion CZK), just have a problem with finding counterparties demand.

Second Extending collateral in repo operations it does not make much sense. Czech banking sector has excess liquidity and CNB repo operations in the Czech Republic have the character of sterilization operations. Therefore, we do not see the logic for extending collateral. Perhaps only for a possible program of selective liquidity for some (smaller) banks are faced with difficult obtaining liquidity.

What else can (or intends) to do CNB can be found on the web Investment

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