It’s no secret that the toolboxes of central banks are looking a bit empty these days. In the old days when economies were always on the up they could tinker with the interest rates and that was indeed their main job. With interest rates at around zero long term, the central bankers are clearly stymied and looking for other tools.
The Czech National Bank found such a tool in fixing the exchange rate against the euro. It’s not a bad tool at that given the fact that the Czech economy is export oriented and most of the exports are going to Germany and other euro using economies.
But while Czech exports rise to record levels, the main aim of the low crown policy is not delivering in terms of boosting inflation below its current sluggish rates. In February, year on year inflation was 0.5 percent, another disappointment for the central bank which had in an earlier report tipped the figure to be 0.8 percent.
Lower food prices, and ,more importantly, low oil prices, were the main reasons for the inflation shortfall. Shed of the oil price affect, the bank points out that inflation was slightly above 1.0 percent, actually around 1.3 percent, helpfully fueled by the booming Czech economy and higher wages.
The central bank says the low crown policy will continue throughout 2016 and could at the earliest be abandoned in mid-2017.
It is clear though from the latest meetings of the board that they are not averse to casting around for other tools in a pretty bare toolbox.
Negative interest rates, where depositors are actually charged for keeping cash on account, was raised as a subject for discussion. The European Central Bank is actually already charging negative rates of a record minus 0.4 percent for cash kept overnight on deposit. The idea of negative interest rates is that they could encourage people to shift their cash from accounts and invest in the real economy. Some of the downsides are that they could just move it elsewhere and that as a long term policy it risks the financial health and earning capacity of banks.
And with the European Central bank having its main interest rate at zero, compared to the Czech two-week rate at 0.05 percent, and its overnight rate in negative territory, there is clearly a risk that the Czech National Bank could face pressure, likely upward pressure on the crown which it will have to fend off with interventions, to follow suit into negative territory.
So far, the minutes of the monetary board discussions from the end of March suggest most Czech National Bank board members are not convinced of the merits of negative interest rates for boosting the economy or influencing inflation appreciably.
But on one of the oft cited downsides of negative rates, the impact on retails banks, the Czech central bank does not appear too concerned. Czech banks are in relative healthy form and could take on board “any slight reduction of banks’ margins” that could result from such a move, the minutes state. The conclusion: negative rates are not yet in the Czech toolbox but they are clearly being eyed as a future option if the low crown comes up short.
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