Speculation over crown mounts but switch to euro still distant according to bank governor

20-02-2017

Speculation is rising about the when and wherefore of the Czech crown’s exit from the low crown regime. But even amidst this uncertainty, according to central bank governor there is still no likelihood in the short term that the crown will be ditched for the single currency euro.

Jiří Rusnok, photo: Filip JandourekJiří Rusnok, photo: Filip Jandourek The Czech crown is currently a popular currency. Speculators have been piling into the crown on the expectations that it will strengthen once the central bank’s ceiling on its appreciation against the euro is relinquished. That fact was recently admitted by Central Bank governor, Jiří Rusnok.

“After the previous meeting of the bank board we have seen that there is a lot of interest in the crown and that it is being excessively bought up. There are many investors, we could say speculators, who are anticipating the change and buying up crowns and expect to make a profit on it.”

The central bank intervened to the tune of 88 billion crowns to counter that speculation and keep the currency weak in December alone. And over the past three-and-a-half years of the weak crown regime the total spent by the central bank on intervention to maintain the crown at or above 27 crowns to the euro comes to around 1.4 trillion crowns. That’s around a third of a single year of total Czech Gross Domestic Product.

Faster and firmer growth in inflation, which took the central bank somewhat by surprise at the end of last year, now looks like prompting the end of the low crown regime by the middle of this year. And some government ministers were warning last week that the exit from the low crown could be accompanies by wild fluctuations in the currency that would damage Czech business across the board.

The low crown is judged globally to have been a success according to bank governor Rusnok, mainly for having avoided the prospect of deflation, although its eventual employment was a lot longer than anyone expected originally. Its use underlines the room for maneuver that an independent central bank can have when other options in the financial toolbox have disappeared. It’s the sort of flexibility that would be limited as part of a bigger currency grouping such as the euro zone.

Photo: Pixabay, CC0 Public DomainPhoto: Pixabay, CC0 Public Domain And according to Jiří Rusnok there are no prospects of the Czech crown being replaced in the short term by the euro as members of the single currency still have a lot to do to put their house in order. But, he says the target of sharing the same currency as the Czech Republic’s biggest trading partner, Germany, should still be on the horizon.

“I maintain that we, once the situation in the Eurozone settles down, should have the same currency as Germany. I don’t know whether it will be the euro, let’s hope it is. But at this stage we don’t know. This big club that we should be looking to join has so many of its own problems and it’s in our interest that they overcome and solve them. But at the moment this [euro membership] is a platonic discussion for the Czech Republic.”

20-02-2017