published: 27.12.2013, 10:35 | updated: 27.12.2013 10:37:37
Prague - Easing of the monetary conditions by the Bank Board of the Czech National Bank (CNB) through the weakening of the crown's rate at the beginning of November was appropriate to the current situation, the CNB said in the minutes from the Board's meeting held on December 17.
Overall, the new data confirmed previous communication that the CNB would keep the exchange rate close to Kc27/EUR at least until the start of 2015, the bank said in the minutes which it released today.
The weakening of the crown's exchange rate undertaken in November was significantly reducing the risk of sustained deflation. It would accelerate the return of inflation towards the CNB's target and speed up the recovery of the Czech economy, the central bank said.
In the Bank Board's discussion that followed the presentation of the situation report, the prevailing opinion was that easing the monetary conditions using the exchange rate in a situation of zero interest rates had been the necessary response to domestic economic developments.
However, it was also said that the interventions could have been postponed and that their introduction had encumbered the economy with additional uncertainty and might have an adverse impact on consumer demand and the renewal of investment.
On the other hand, it was also said that the easing of the monetary conditions should have happened earlier, because monetary policy should be forward-looking and not wait for deflationary risks to materialise.
In this context, it was said that a delayed monetary policy easing might have come at the cost of more deeply anchored deflationary expectations, which were contributing to the economic contraction.
It was said that the interventions could not entirely prevent deflation, but were very significantly reducing the risk of long-term deflation.
The Bank Board agreed that the domestic economy was not inflationary in its effect.
The economy was below its potential and was not emerging from the trough of the business cycle, and domestic demand was depressed. It was said that there were no inflationary pressures apparent in the labour market either.
However, it was also said that the available information implied only a short period of deflation, in which falling energy prices would play a significant role, which was positive for the economy.
The CNB's Bank Board left interest rates unchanged at record-low levels on December 17 and decided to continue in forex interventions whose aim is to keep the crown's rate close to Kc27/EUR.
The CNB has kept interest rates at all-time lows for more than a year. The benchmark two-week repo rate is 0.05 percent.
The crown fell versus the euro as low as Kc27.62/EUR following the interventions, which was the weakest level since March 2009.
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