Forex interventions could end in a matter of days

27-03-2017

The forex interventions policy launched by the Czech National Bank in November 2013 as an instrument for maintaining monetary stability could soon be a thing of the past. Economists predict the central bank could decide to end interventions as early as the beginning of April. I spoke to David Marek, chief economist with the consultancy Deloitte, about the likelihood of such a move and its immediate impact on the economy.

David Marek, photo: Šárka ŠevčíkováDavid Marek, photo: Šárka Ševčíková “We know for sure that the current intervention regime of the Czech central bank should change sometime during the second quarter of this year, however now we can expect that it will be sooner rather than later. There is no reason to continue with the forex interventions, the inflation is above the bank’s inflation target and there are strong forces building against the central bank on the foreign exchange market. If the intervention policy were to continue these forces would get even stronger and the volume of interventions, which has increased, would get higher and higher. This is a potential source of future losses of the central bank so there are strong reasons to quit the forex intervention regime sooner.”

How fast may the crown appreciate as a result?

“We can expect a much higher volatility of the exchange rate once the interventions end, but no one knows in what direction the currency will move immediately after the announcement. What we can expect in the long run is that the Czech currency will appreciate, currently it is undervalued by maybe ten percent and we can expect this gap to close in the future.”

Do you think that if it appreciates too fast the central bank could continue with sporadic intervention?

“I would expect that the central bank will try to eliminate extreme moves on the market, but really extreme moves only. So I would expect the bank to step in if the Czech currency should appreciate by 5 to 10 percent in one day. Then the bank could try to smooth the path of the exchange rate, but otherwise it will be up to the market to absorb the shocks following the end of forex interventions.”

And how do you see the immediate impact on the economy –on exporters?

“I would say that the economy is quite well prepared for such a move because many big exporters use forex hedging tools so they are prepared for the coming months and they shouldn’t be affected by any movement on the market. So I would say the impact will be gradual.”

27-03-2017