The CNB decided not to launch the interventions even though the August forecast’s risks to inflation were slightly on the downside and the exchange rate was slightly stronger ahead of the September meeting. Bear in mind that the August forecast alone theoretically justified the interventions – we estimate the exchange rate implied by the forecast to be CZK 26.20 per EUR.
Why then are the central bankers hesitating to launch the interventions? Simply because a number of them are not sure whether the benefit of the forex interventions would counterbalance the costs associated with their launch. The actual impact of forex interventions on the performance of the Czech economy and on the inflation target is highly uncertain. The nightmare scenario would be where increased imported inflation (caused by the weakened koruna) would cut real household wages and again postpone the recovery of domestic consumption.
The last time that the central bank intervened against the koruna was 2002, and the CNB’s working papers tend to cast doubt on the effectiveness of those interventions. Moreover, the launch of forex interventions would partly affect the transparency of the existing inflation targeting mechanism. Those are the possible reasons, why several central bankers are hesitating to launch the interventions.
However, the actual explanation, why the Central bank has not opted for another instrument of its monetary policy will be known next week when the CNB Minutes will be released.
Still, yesterday’s decision does not mean that interventions will be impossible in the future. We believe that some central bankers (Singer, Tomšík, Lízal) would be willing to launch them immediately. Determining the matter will be the attitudes of some of the other ‘hesitant’ median bankers (Mojmír Hampl in our opinion).
These bankers likely need to see stronger arguments for the interventions than at present, arising from the current forecast and the spot exchange rate. As we do not anticipate a significant deterioration of the current (August) forecast in November, the CNB’s interventions may essentially only be triggered by a greater appreciation of the koruna. Such appreciation is not ruled out, at least in the forthcoming weeks – as some market participants are already tired of the endless intervention threats. Nevertheless, the question is the levels at which the hesitant CNB members would decide to intervene. We bet on levels around CZK 25.40 per EUR. Pay attention to any change in the statements from Mojmír Hampl or Kamil Janáček in particular.