The CNB buys foreign exchange worth about CZK 200 billion
The Czech National Bank bought foreign exchange worth about CZK 200 billion in its foreign exchange interventions in the period up to 20 November. According to the ten-day balance sheet, the CNB’s total assets increased to CZK 1,077 billion as of 20 November 2013. By selling koruna and purchasing foreign exchange, the CNB in its forex interventions – based on a Bank Board decision – has weakened the koruna exchange rate very quickly to levels close to CZK 27/EUR in an effort to avoid the risk of harmful deflation and to maintain price stability.
The Bank Board decided on 7 November 2013 to use the exchange rate as an additional instrument for easing the monetary conditions.
“Our long-term commitment is to keep the exchange rate close to CZK 27/EUR, and we achieved this level quite soon after the Bank Board decision was disclosed. The intervention purchases of foreign currency and sales of koruna aimed at weakening the exchange rate were concentrated in the first days after the decision. It was clear after the first weekend that the market believes in our decision, and we do not always need to maintain an active presence in the market,” said CNB Governor Miroslav Singer.
“It still applies that the CNB is resolved to intervene in the FX market in such volumes and for such duration as needed to reach the desired exchange rate level and thereby smoothly fulfil the inflation target in the future. As regards interventions to weaken the exchange rate, we are not limited by the amount of international reserves,” added Mr Singer.
In its decision of 7 November, the CNB Bank Board undertook to prevent excessive appreciation of the koruna below CZK 27/EUR by intervening in the foreign exchange market, i.e. by selling koruna and buying euro. The CNB considers this a long-term commitment.
The ten-day data as of 20 November include the impact of the forex interventions on the CNB’s balance sheet for the first time. The balance sheet as of 10 November did not reflect these operations, as they were settled at a later date.
The ten-day balance-sheet data reveal that the CNB’s liabilities to domestic banks increased by CZK 201.3 billion during the ten days to 20 November 2013, mainly because the CNB was selling koruna and buying foreign currency in the interventions. From the accounting perspective, the interventions lead to an increase in the central bank’s forex assets and a proportionate rise in its koruna liabilities to banks.
Interventions in the foreign exchange market are a normal transaction. Consequently, they are not a mere koruna outlay, but are an investment and lead to an increase in the CNB’s international reserves. With interest rates at zero, the central bank issues Czech koruna during the interventions without incurring any costs. The CNB invests the euro it buys during the interventions in high-quality securities, primarily government bonds of countries such as the United States, Germany, Sweden, Canada and Australia. The financial crisis has shown that higher international reserves are more beneficial to a country’s financial stability than lower reserves.
The CNB publishes balance-sheet and international reserves indicators on a regular basis. The stock of international reserves as of the end of November will be published on 6 December 2013. The international reserves consist of the CNB's liquid foreign assets in convertible currencies. They include monetary gold, special drawing rights, the reserve position in the International Monetary Fund and external short-term assets (i.e. deposits, securities, foreign exchange and other assets).
Marek Petruš
CNB spokesman
