Research (Conseq)
Currencies  |  January 09, 2013 13:39:08

Foreign exchange intervention CNB - last trump is already on the table!

CNB early November, pumped his conventional ammunition in the form of reducing the base repo rate, which determines the interest for which the bank deposited with the central bank's two-week money

Other ways to stimulate the domestic economy, central bankers have nezbývají. Quantitative easing, for example in the form of central bank buying bonds in the Czech conditions does not make sense. Domestic banks are liquidity is rather crowded and currently do not know what to do with money.

So de facto the only way to soften monetary conditions are exchange intervention against the Czech koruna. These means of weakening the exchange rate cheaper domestic goods and services in foreign currencies and thus stimulate exports, which account for more than 35% of domestic production. CNB finally admitted such interventions have in the results of the November board meeting, together with temporary interruptions shift income from foreign exchange reserves for the crown, which in turn strengthen the domestic currency. In the Czech Republic also has currency depreciation and a large negative impact on the ability of households and businesses to repay their liabilities in foreign currencies. And that's simply because the domestic agencies too have such obligations.Neither excessive inflation, resulting from an increase koruna prices of imports from the macroeconomic point of view is not a problem, because inflation adjusted for the effects of fiscal and administrative moves to the National Bank and the risk of future inflation. A CNB as she admits, are more on the downside.

The big question, however, the effectiveness of foreign exchange interventions, the ability to influence the long-term exchange rate. Historical experience and a number of economic studies show that the real impact of foreign exchange intervention on the exchange rate is rather short.Central banks are therefore unable overprinting long term market. Already, however, the actual verbal intervention, warning of the possibility of using this tool, evidently done its part. Euro is compared to its previous low current by more than 4%, respectively. 1 CZK more expensive and the crown to strengthen currently does not have too. I believe that the real exchange intervention in such a situation to fight off course even a few tens of cents, but in a few months to a year to return to the strengthening crown, which is the only channel called real convergence with the advanced countries of Europe. From this point of view, the central bank was actually his last trump card on the table laid, bought without a single euro.

But it will not work forever. Wolf also promised ... all to seriously next time, he would occasionally go beyond words as well as deeds. CNB therefore would not want to risk their credibility and realistic intervention against the Crown in the near future proceeding.


Lukas Vacha,

Business Manager

Conseq Investment Management, Inc.

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