Czech National Bank

November 7, 2013

As in Hong Kong, Singapore, and Switzerland, Czech monetary policy henceforth will be subordinated to an exchange rate policy mandate.  Some central banks like the Fed, Bank of Japan, and Bank of England have used asset buying to stimulate monetary policy once their interest rates are virtually at zero.  Monetary officials in the Czech Republic have revealed a preference for the exchange rate as their unconventional policy tool of choice.  The two-week repo rate has been at 0.05% since a 20-basis point cut on November 1, 2012.  Previous cuts of 25 bps were implemented in September 2012, June 2012, May 2010, December 2009, August 2009, and May 2009.  From a peak of 3.75% prior to August 2008, it was also cut 25 bps that month, 75 bps in November 2008, 50 bps in December 2008, and 50 bps in January 2009.

A statement from the CNB lays out the new policy framework that for the foreseeable future will intervene in such fashion that the koruna will shadow the euro at a parity of CZK 27 per euro.  The Czech currency fell almost 5% today to that level.  Zero inflation is anticipated next year versus a target inflation rate of 2.0%.  Officials detect no upside inflation risk in that period.  GDP fell 0.9% last year but with this new support is expected to advance 2.1% in 2014.

Copyright 2013, Larry Greenberg.  All rights reserved.  No secondary distribution without express permission.



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