A nalysis
The koruna depreciation
an apt decision or a dead end street? with
The Bank Board of the Czech National Bank (CNB) decided to use the exchange rate as a monetary policy instrument, and therefore to commence foreign exchange interventions, in November 2013. On this basis, the Board accomplished a depreciation of the exchange rate of Czech koruna, which had oscillated around CZK 25/EUR until then, not to “allow the koruna to appreciate to levels it would no longer be possible to interpret as ‘close to CZK 27/EUR’.” The Bank Board explained this decision by insufficiency of the hitherto used main monetary policy instrument, gradually lowering interest rates to technical zero, to boost the Czech economy strongly hit by the global financial and economic crisis. Another supporting argument was a growing risk of deflation, as prices of many items in the consumer basket (especially consumer goods) had meanwhile been falling for some time and there was a danger that households and firms would have taken falling prices for granted and incorporate them into their expectations and wage setting. The CNB has not deviated from this standpoint so far, as its latest statement of 16 December 2015 documents. It informs that “the Bank Board decided to continue using the exchange rate as an additional instrument for easing the monetary conditions and confirmed the CNB’s commitment to intervene on the foreign exchange market if needed to weaken the koruna so that the exchange rate of the koruna is kept close to CZK 27 to the euro.” At the same time, the Bank Board stated again that the likely timing of the discontinuation of the exchange rate commitment was around the end of 2016. The historical decision of the CNB has evoked a vivid discussion among economists from the very beginning until now. The adamant position of the currency regulator represented by
Governor Miroslav Singer and the members of the Board has been supported by exporters, particularly from manufacturing industry. Those companies would welcome the Bank to hold weak koruna for a longer period. Also one of prominent economists, Jan Švejnar, recommended lately continued depreciation of Czech koruna, as he sees the risk of deflationary development still on the scene. But the camp of opponents has also come with strong arguments. First of all, they, like Pavel Kohout, stressed the fact that the Bank had stuck too much to traditional models averting a deflation spiral, not having taken into account that the existing low inflation (not only a Czech, but also a global one) had been initiated mostly by lowering oil and natural gas prices. It would be also disputable whether the classical image of a consumer deferring purchases in expectation of even lower prices could hold in the recent Czech situation. Statistical data document that the existing upsurge of the Czech economic growth is driven from a significant part by domestic consumers’ demand that was delayed during a protracted crisis and can no longer be withheld. The opponents also introduce a recent Swedish example. This smaller and open economy has experienced several external shocks since 2008 and also some deflationary development. Notwithstanding that, the Swedish economy has enjoyed a steady growth rate since early 2014 in spite of (or thanks to?) a prevailing deflationary situation. They also stress the case that the Swiss National Bank had to abolish the limit for the exchange rate of the domestic currency in January 2015 due to the growth of costs keeping Swiss franc at a required level and to easing monetary policy of the European Central Bank. A swift releasing of the franc exchange rate brought some initial turbulence but contributed Swiss competitiveness in the end. Therefore Mark Brütsch, Chief Economist of Swiss Life, a prominent financial company, recommends the same decision for Czech koruna. The specific concerns of decreasing competitiveness and adverse structural shifts in the Czech economy are another theme of criticisms that have followed the koruna depreciation. This position is kept e.g. by Tomáš Munzi or Lukáš Kovanda. According
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to them, the depreciation has created a „soft cushion” particularly for those export industries that have otherwise problems to retain their level of international competitiveness. On the contrary, high value-added industries relying on international cooperation are hit by more expensive inputs. This may result, in longer term, in deterioration of product structure of the Czech economy, literally in a “return to mounting shop”. Statistics from the Czech Statistical Office might support this opinion in a way. E.g. while total Czech exports grew during January-October 2015 in comparison to the same period of 2013 by 21.6%, of which those of products of agriculture, hunting by 26.9% and of motor vehicles, trailers and semi-trailers by 39.9%, the exports of computer, electronic and optical products (which may stand for high value-added products) grew only by 18.4%. Nevertheless the period of comparison is too short to state this as a certain trend. Another cloven hoof is hidden in the nature of such artificial decisions against market development. They are someway like drug addiction: simple to enter but difficult to exit. A quick release of the exchange rate of koruna to a market clearing level might disequilibrate the koruna market with an adverse impact on the Czech economy, and CNB would have to use a considerable part of its reserves to prevent a too quick revaluation. A gradual release of the exchange rate, more cautious and pre-announced, would in turn expose CNB to a risk of speculations and of testing announced deadlines. The firm position of CNB as to setting the termination of interventions against koruna not earlier than end 2016 has brought so far a certain extent of assurance. It is now necessary to wait and see. Only after the koruna exchange rate returns to a natural and equilibrated level it will be possible to make a final account and assess whether the interventions of CNB brought more benefit or harm. Emanuel Šíp Partner Allied Progress Consultants Association české znění naleznete v elektronické verzi magazínu na www.czechleaders.com
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