No Czech intervention but watch the crown

February 7, 2013

The Czech central bank surprised many this week after its policy meeting. Widely expected to announce the timing and extent of FX market interventions, Governor Miroslav Singer not only failed to do so, he effectively signalled that intervention was no longer on the cards — at least in the short term  In his words, looser monetary conditions were now “less urgent”.

What changed Singer’s mind? After all, data just hours earlier showed Czech industrial production plunging  12 percent year-on-year in December. The economy has not grown since mid-2011 and is likely to have contracted by more than 1 percent last year. Singer in fact predicts a second full year of recession. But some slightly upbeat-looking forward indicators could be cause for cheer. According to William Jackson at Capital Economics:

We think that the need for further policy loosening was tempered by the tentative pick-up in the most recent survey data as well as the fall in the crown (versus the euro) since the start of the year.

Until yesterday’s meeting, the crown had fallen 3 percent since the start of the year to seven-month lows against the euro.  January purchasing managers indexes (PMI) this week also showed the Czech indicator rising more than expected to 48.3, up from December’s three-year low of 46.0. That gelled with a pick-up in PMIs also in neighbouring Poland and Hungary.  A separate survey also shows that the business climate in emerging Europe ticked higher in January for the first time since April. The OeKB Central and Eastern Europe Business Climate index of around 400 Austria-based direct investors edged up to 17 points, from 14 in October and the Czech component rose two points to 24, the highest since the second quarter of 2012.

Even more crucial perhaps have been the recent indicators from Germany, United States and China, on which hinge the fortunes of the export-dependent Czech economy. The German PMI chalked up its biggest one-month rise in January since August 2009, soaring to its highest since June 2011.  The Czech National Bank has increased its medium-term inflation and growth forecasts slightly. According to Singer:

The possibility of the greatest shocks seems to be a little dampened.

Jackson of Capital Economics notes however that Singer has not closed the door on further easing and still expects inflation to fall below target by early 2014.

Perhaps more importantly, the crown reacted to Singer’s remarks yesterday by rallying 1.5 percent. It is up a further 0.4 percent today and that wipes out most of the currency’s 3 percent depreciation since the start of 2013.  Analysts reckon that markets will take Singer’s comments as a signal he is not inclined to intervene and are likely to push the crown higher as a result, undoing some of the monetary loosening on which he had based his decision.

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