Business Central bank holds all the cards on weakening currency

17-01-2014 14:46 | Chris Johnstone

More than two months have gone by since the Czech National Bank launched its surprise foreign currency intervention to weaken the Czech crown. Complaints are still continuing from sections of industry but the central bank has no immediate need to alter its course.

Czech National Bank, photo: Štěpánka BudkováCzech National Bank, photo: Štěpánka Budková President of the Czech Chamber of Industry and Tranport Jaroslav Hanák complained again this week that the foreign exchange intervention of the Czech National Bank was a mistake and that it risked driving vulnerable transport companies in particular to the wall.

Hanák’s influential grouping sees little upside from the central bank’s move to weaken the crown and by preventing it strengthening to more than 27 crowns to the euro. The chamber expects Czech economic growth of 1.0% only this year.

And it is not alone in playing down the positive impact of the lower crown. Exporters who are set to benefit most from the weaker crown are more likely to pass on profits to their shareholders than take on many more workers or launch new investments, argue some economists.

They point out that Czech exporters were already performing relatively well before the bank’s move and that it is domestic demand which really needs the boost. Whatever the ongoing arguments, the central bank has said it will stick to its weak crown target for at least a year.

Some Czech analysts believe it might be mid 2015 before there are any signs of a policy change. The imminent arrival outgoing prime minister Jiří Rusnok on the central bank board is only likely to strengthen the calls for a weaker crown.

The central bank appears to hold all the cards when it comes to depressing the value of the local currency. One simple way is printing more crowns and selling them for foreign currency if the need occurs. This amounts to a double whammy of weakening, first from the printing and then from the selling the currency.

Trying to strengthen a currency under pressure is a far less simple matter because the bank’s main weapon is to draw on its own limited foreign reserves. They can hope that other central banks will help out as well, but that’s far from certain. Desperate attempts over the last decades to support the British pound have shown that supporting currencies can be an expensive and, finally, frustrating policy.

The opposite has been very much the story so far for the Czech central bank. Selling crowns and buying other currencies helped the bank turn a handsome profit of around 73 billion crowns last year compared with almost 3 billion crowns in 2012. The lower the crown fell, the higher became the value of foreign currency assets it was accumulating. Of course, the central bank insists that its end year profit is not the reason for intervention, but it is not an unhappy side effect all the same.

Some of Hanák’s complaints could prove eventually on target but he is not likely to get any short term joy.

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