Currency Intervention and Forex Reserves the Czech Perspective

Transcription

1 Currency Intervention and Forex Reserves the Czech Perspective Mojmír Hampl Vice-Governor, Czech National Bank 8 th Annual NATIONAL ALM Asia Conference 8 July 2015, Raffles Hotel Singapore

2 Outline Key facts about the CNB s monetary and exchange rate policy The CNB s exchange rate commitment when, why, how Comparison with the Swiss case Impact of the CNB s ER commitment on ER volatility, FX reserves, economic activity Options for the CNB s exit from the commitment.

3 The Czech National Bank s monetary policy regime The law requires the CNB to maintain price stability. The CNB s target is to keep inflation at 2%, with a tolerance band of ±1 pp. The standard tool is the interest rate (2W repo rate). Under standard circumstances, the FX regime is a managed float.

4 The Czech National Bank s FX operations and CZK/EUR Three intervention episodes in the early years of inflation targeting to slow down currency appreciation. Recent interventions to support the CNB s exchange rate commitment at the ZLB, but only for a few days. Sterilisation of government privatisation revenues (and EU funds). Sales of FX reserves yields from 2004 (suspended in Nov 2012).

5 The Czech economy prior to the CNB s FX commitment (FX floor) Falling inflation (by Oct 2013 inflation net of a VAT hike was negative). Weak domestic demand (output gap estimated at between -2% and -4%). Sizeable fiscal consolidation and savings glut Stagnating nominal wages. Monetary policy reached the ZLB (repo rate at technical zero ) The CNB was concerned about deflationary expectations and actual demand-driven deflation.

6 The Czech National Bank s FX commitment and CZK/EUR On 7 Nov 2013, the CNB declared its commitment to push CZK/EUR above CZK 27 per 1 EUR and to keep it from falling below that level. Theoretical framework: fool-proof way by Lars Svensson (NBER, 2000) FX reserves rose by some 25% in 3 days.

7 Important inspiration: The Swiss National Bank s CHF/EUR floor The monetary policy regimes of the SNB and the CNB share some similarities: Both serve small open economies. Both use the IT framework (CNB: 2% ± 1 pp ; SNB: less than 2%). Both use the interest rate as a standard policy instrument. After their standard instrument hit the zero lower bound, both considered unconventional tools and ended up using an ER floor. SNB set the floor (at least EUR/CHF 1.2) in September 2011, a month after hitting the ZLB. CNB set the floor (at least EUR/CZK 27) in November 2013, a year after hitting the ZLB. But there are some major differences, too. These pertain to: 1. The primary reason for the ER floor. 2. The road to the floor and its details. 3. The international status of the economy. 4. The central banks profit track record and communication.

8 The CNB vs the SNB: The primary reason for the ER floor The SNB s rationale was to stop CHF from getting even more overvalued. Robust domestic demand. Frothy real estate markets. SNB concerns: exports/real economy. (The CNB s rationale was to avoid deflation.) (The September 2011 forecast already takes the floor into account and is based on the assumption of a further weakening in the Swiss franc.)

9 The CNB vs the SNB: The road to the floor The SNB took several intermediate measures in FX interventions (after 17 years of absence from the market). Mentions of line in the sand at CHF 1.50 for 1 EUR; FX swaps. Targets for the volume of CHF liquidity (after hitting the ZLB in Aug 2011). The floor was set to keep the ER largely near recent actual levels. The CHF floor was declared without specifying any time frame. The CNB learned from the SNB s experience. After the ZLB on interest rates was hit in November 2012, the CNB mentioned influencing the ER as the next step. During 2013, this possibility was being emphasised more extensively. In between there were no actual interventions and no other unconventional measures were taken. The floor meant a depreciation of about 5% from recent actual levels. After the floor was introduced, its exit time frame was described as at least until the beginning of 2015 (now at least until 2H2016 ).

10 The CNB vs the SNB: Status of the economy, CB track record CHF is viewed as a safe haven currency. So it is the destination of huge capital flows. This status makes it much harder/more expensive to maintain the ER floor. The CNB puts more weight on transparency than the SNB does. It has spelled out the floor s exit time frame (even if tentative). Its representatives explained the decision in a number of articles, speeches, interviews and blog entries on its website. After around three quarters, its experts published a detailed analytical paper about the decision to set the floor and its context (theoretical, empirical, international). Up to 2013, the CNB was making losses. Thus no transfers of money to the government. Indications of future losses a political non-issue in the Czech Republic.

11 Impact of the floor: ER volatility Coefficient of variation = SD/mean.

12 Impact of the CZK/EUR floor: The CNB s FX reserves FX intervention in Nov 2013 raised the share of the EUR portfolio above the target level. Therefore, during 2014 the excess was rebalanced mainly into CAD, AUD, SEK. Since 2012, the share of equities has hovered at 10% of FX reserves (growth in bonds has been matched by a rise in equity prices).

13 Impact of the CZK/EUR floor: Economic activity Difference GDP -0.7% 2.0% 2.7 pp Gross value added -0.6% 2.6% 3.2 pp Contributions of individual factors to GDP (GVA) growth Fiscal policy pp 0.24 pp 1.2 pp EA growth 0.4 pp 1.0 pp 0.6 pp Monetary policy (+ sentiment) 0.9 pp (1.4 pp) Source: CNB, CZSO 0.9 pp (1.4 pp for GVA) of the improvement in economic growth is due to relaxation of monetary policy (+ improved sentiment). Net exports have actually made a negative contribution to GDP growth, as imports have been boosted by a recovery in domestic demand (i.e. there is no beggar-thy-neighbour problem).

14 The CNB's exit from the ER floor The CNB should exit from the ER commitment only once monetary policy tightening (repo rate hike) is needed and this need is strong and durable enough to ensure that the repo rate will not have to be cut to the ZLB again. During the term of the commitment, the weaker CZK/EUR is passing through to the price level and other nominal variables. So, the exit should not trigger CZK/EUR appreciation to pre-commitment levels. The exit will mean that the CNB moves back to inflation targeting combined with a managed float. This means that after the exit, the CNB will be ready to stem any ER movements it views as excessive and non-fundamental (just like at any time since the CNB introduced inflation targeting in 1998). The aforementioned differences from the Swiss case lead us to hope that the CNB s exit from the ER floor will be smoother than that of the SNB.

15 Thank you