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After CNB repo rate reaches a “technical zero”, koruna weakens in high-volume session

After CNB repo rate reaches a “technical zero”, koruna weakens in high-volume session

2.11.2012 10:51

At its meeting held on Thursday, the Czech National Bank (CNB) Board again decided to cut its interest rates. Thus the central bank’s base rate hit a new all-time low of 0.05% and made a commitment to keep it there until it sees a significant inflationary pressure.

Statements from the CNB made prior to the meeting had already signalled that the rates would be cut again. A new forecast, available to the CNB Board, also contributed to its decision as it is more pessimistic about the economic outlook - the CNB forecasts 0.2% GDP growth for the next year which is more or less in line with our scenario which foresees zero growth for the Czech economy. Domestic demand is completely muted, with negligible hopes of improvement. Moreover, another increase in consumption taxation (VAT), which would curb household expenditure next year, may affect that situation.
The CNB Board also decided on Thursday that it would no longer sell yields from its forex reserves, in an evident effort to avoid pouring oil on the flames by stimulating demand for the koruna and thus contributing to its appreciation. Nevertheless, the question is whether this will actually have any impact. The Czech National Bank currently keeps €31.5bn in forex reserves while the annual yield from those reserves will not exceed €600m. This sum (distributed among business days, it is ‘just’ approximately €3m) will scarcely stir the Czech forex market.
Thus, a more important fact for the koruna is that interest rates have fallen to the ‘technical zero’; moreover, the CNB is threatening to intervene against the Czech currency. Therefore, when the global economic situation improves, the koruna may become a ‘victim’ of carry trades, when speculators will borrow at the ‘zero’ rate in Czech korunas and deposit those funds in higher-interest currencies abroad (such as the zloty or the forint).

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