Interview of Jan Procházka, Bank Board Member
By Krystof Chamonikolas (Bloomberg 26. 7. 2023)
CNB Bank Board member Jan Procházka in the second part of his interview for Bloomberg:
A recent depreciation of the Czech currency may be temporary and buyers are likely to return in the coming months even without the central bank’s market intervention, a board member said.
The koruna has been under pressure because investors are overly pessimistic about the Czech Republic’s economic outlook and wrongly expect rapid interest-rate cuts starting this fall, central banker Jan Prochazka said in an interview in Prague on Tuesday
“The Czech economy has repeatedly surprised us by doing better than expected or avoiding certain negative scenarios,” he said. “The negative sentiment toward the koruna now is partly because the market expects these brutal rate cuts that I simply don’t believe will happen.”
After reaching its strongest level against the euro in 15 years this April, the koruna turned into a laggard as the economy’s prolonged stagnation coincided with mounting bets on monetary easing.
While the euro area and the US are projected to raise rates further, Czech money-market prices imply at least 275 basis points of cuts over the next 12 months, starting in September. But Prochazka expects Czech borrowing costs to stay unchanged for the rest of the year, which will help slow inflation to the central bank’s 2% target and restore the currency’s appeal.
He also repeated the central bank’s pledge to sell foreign reserves to counter any sharp koruna selloff, although he said the recent weakening didn’t warrant an intervention.
“We are ready to intervene against extreme market moves, and we have extremely high reserves that we’re ready to deploy if need be,” he said. “With the interest-rate differential likely shrinking in the future we’re not going to fight the market over some fundamentally justified moves.”
The koruna has lost 2.4% against the euro in the past three months, the most among European currencies except the Russian ruble. It stood at 24.08 per euro Wednesday, compared with the central bank’s 23.67 forecast for the third-quarter average. Prochazka expects the country’s key car industry to soon resolve a shortage of chips that has held back production and exports since the start of the pandemic.
The government’s plans to cut the budget deficit are a step in the right direction, he said, adding they will reinforce market perceptions of the country as more politically stable than some of its regional peers including Hungary and Poland. “When investors realize all that, they may turn more positive toward our currency again,” he said.
Read the first part of the interview.