The encyclopedia · Finance & Accounting · Financial decision · 2013-2017
The Czech central bank made the koruna its policy tool to beat deflation.
With rates at zero, the CNB weakened the crown toward a 27-per-euro floor in 2013, importing inflation and hitting its target.
Czech National Bank
the move
The Czech economy faced the risk of deflation with its policy rate already at the lower bound. The central bank's conventional toolkit was out of room, so it needed a way to loosen conditions without cutting rates further.
On 7 November 2013 the Bank Board chose the koruna itself. It said it would keep the exchange rate close to CZK 27 per euro by selling koruna and buying euros, stepping in as needed and treating the level as a long-term commitment. Governor Miroslav Singer stressed the bank was not limited by its reserves.
The market believed the announcement immediately, so the actual interventions were concentrated in the first days. The weakening lifted imported prices, supported demand for domestic goods, and did so at negligible cost because the bank created koruna while policy rates were at zero.
why it works
- The policy rate was already at zero, so further cuts were impossible
- A weak currency imports inflation, which is what a deflation-threatened economy needs
- Announcing an unlimited commitment kept the market from testing the bank
- Interventions at zero rates cost the bank almost nothing to carry
what transfers
When interest rates cannot go lower, a small open economy can still ease by committing to a weak currency, provided its reserves can back the promise.
what came after
The floor held for about three and a half years. Inflation returned toward target, and once that goal was met the CNB let the koruna strengthen again and abandoned the commitment, closing the episode without a currency crisis.
references
- The CNB buys foreign exchange worth about CZK 200 billion
- Czech c-bank holds rates close to zero, launches FX interventions
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