Czech central bank wrong foots analysts, speculators, focused on low crown

31-03-2017

In the poker game that is international financial speculation, central banks often have the best cards in their hands. Of course, that’s not always the case.

Photo: Matěj SkalickýPhoto: Matěj Skalický As the Bank of England’s desperate measures to defend the pound’s continued existence in the Exchange Rate Mechanism (ERM) in 1992 testify. Then, the desperate measure of sky high interest rate hikes were merely seen for what they were - as acts of desperation - and instead of bolstering the bank and pound, backfired and undermined it. It was Mr George Soros and his kind that emerged the exceedingly wealthy winners.

That’s not the scenario with the Czech National Bank right now. Many analysts and, presumably quite a bit of speculative money, was betting on an announcement after the bank board meeting on Thursday that the threat and reality of currency interventions that underpins the low crown policy was going to end.

The cameras and reporters gathered and, presumably traders got ready for the announcement and to cash in on expected rise in the crown….but it didn’t happen. And as a result the crown started falling rather than climbing, a double bonus for the bank by pushing the crown lower to levels where it will not have to intervene and likely sparking losses for more than a few over enthusiastic traders who were betting the other way.

The bank made its rather customary statement afterwards that currency interventions will continue to be used if necessary to keep the crown at or below 27 crowns/euro. And that would now appear to shift speculation on the end of the low crown back to mid-year rather than the April date that many analysts had converged on. It’s not clear whether the bank itself changed its mind at the last minute or was deliberately playing a game aimed at punishing speculation and speculators.

What’s clear for now is that inflation is at a level above the bank’s target 2.0 target rate and that intervention and the low crown could easily be ended. Inflation already reached that level in December last year and the annual inflation rate reached 2.5 percent in February.

However, central banks are usually cautious creatures and a few more months of comforting figures to make sure that the trend is above 2.0 percent would not probably go amiss. The March inflation figures are due out on April 10, there’s a new macro-economic prognosis out in May 5 and the April inflation figures on May 10. All these could help the bank board to take the plunge. Of course, a sudden fall in oil prices could set inflation tumbling, though that looks unlikely with most expectations that oil will stay around 55 dollars/barrel for the rest of the year.

If, or rather when, the props to the weak crown regime are removed, the bank will go back to more orthodox monetary policy with interest rates back as the main tool in the box. Of course sporadic currency interventions might still be held up the sleeve if the crown starts becoming too turbulent or appreciates too fast. And that could be another welcome opportunity to punish the speculators.

31-03-2017