The currency peg problems of the Czech National Bank mount

A regular issue in economic  discussions is of course exchange-rates and their impact. There are strengths and weaknesses in both floating and fixed exchange-rates and today I am going to look at a variant of a fixed exchange-rate. The irony here is that it is caused by another fixed exchange-rate as we see yet another country struggling to cope with the consequences of being a near neighbour to the supermassive black hole that is the Euro project. We have at various times looked at Denmark, Sweden and Switzerland but today it is time to return to the Czech Republic. This feeds into another of my themes which is how do the central planners return to free markets? One issue that has arisen overnight is the one of some “being more equal than others” at such times. From Reuters.

Richmond Federal Reserve President Jeffrey Lacker abruptly left the U.S. central bank on Tuesday after admitting that a conversation he had with a Wall Street analyst in 2012 may have disclosed confidential information about Fed policy options.

The 2012 leak had triggered a criminal investigation after research firm Medley Global Advisors told its clients the details of a key Fed meeting a day before the Fed released its own record of the discussion.

At the Fed’s September 2012 policy meeting, officials laid the groundwork for the massive bond-buying stimulus they were to roll out later that year. Early knowledge of that discussion could have given some traders an unfair edge.

I do like the word “may” because if he did not do it why is he resigning? Also how has this dragged on to as it happens only 6 months before his retirement. Due to the scale of potential gains and losses here there should be a full investigation and maybe a criminal one. Ironically this is one of the few cases of central bank Forward Guidance being accurate which we can file with the foreign exchange dealings of the wife of a past head of the Swiss National Bank and the way the ECB used to privately brief its favourite hedge funds.

The Czech National Bank

Back in 2013 it did this.

The CNB Bank Board decided to use the exchange rate as a monetary policy instrument, and therefore to commence foreign exchange interventions, on 7 November 2013……This means the CNB will not allow the koruna to appreciate to levels it would no longer be possible to interpret as “close to CZK 27/EUR”. The CNB prevents such appreciation by means of automatic and potentially unlimited interventions, i.e. by selling koruna and buying foreign currency.

So a familiar move in that we see another central bank wanting a lower level for its currency. As ever the inflation target is used as cover for what is really yet another version of a competitive devaluation.

A weakening of the exchange rate of the koruna leads to an increase in import prices and thus also in the domestic price level.

Another familiar theme is the promise along the lines of “whatever it takes” or the infinite intervention promise made by the Swiss National Bank.

The CNB can use infinite amounts of koruna to purchase foreign currency, as it itself issues the Czech currency in both paper and electronic form. The CNB is resolved to intervene in such volumes and for such duration as needed to maintain the chosen exchange rate level.

The Czech economy

The labour market is one where the Czech economy has done extremely well according to the latest data. From Czech Statistics.

The general unemployment rate of the aged 15 – 64 years , seasonally adjusted, reached 3.5% in February 2017 and decreased by 0.8 p.p., year-on-year……..The employment rate , seasonally adjusted, reached 73.4% in February 2017 and increased by 1.9 percentage point (p.p.) compared to that in February 2016.

Even rarer was the strong growth in wages seen in 2016.

The continuous demand for labour force exerted pressure on the growth in earnings so the overall average wage increased nominally by 4.2%. The median wage, i.e. the wage of a middle employee determined from a mathematical-statistical model of the wage distribution, increased even more markedly by 6.0%.

They are by far the best labour market figures I have looked at for quite some time so let us continue with the good economic news.

In January 2017, working days adjusted industrial production increased at constant prices by 4.3%, year-on-year (y-o-y). Non-adjusted industrial production was by 9.6% higher. Seasonally adjusted industrial production increased by 3.5%, month-on-month (m-o-m). The value of new orders increased by 7.0%, y-o-y.

The main driver of this was the automobile sector.

manufacture of motor vehicles, trailers and semi-trailers (contribution +3.8 p.p., growth by 18.7%),

With the strong wages and employment data you will not be surprised to see that this morning’s retail sales data was positive as well.

In February 2017, seasonally adjusted sales in retail trade at constant prices increased by 0.9%, month-on-month (m-o-m). Sales adjusted for calendar effects increased by 4.8%, year-on-year (y-o-y).

Actually with all the good news above the total number for economic activity disappoints but is still solid.

According to a refined estimate, the gross domestic product in the fourth quarter of 2016 increased by 0.4%, quarter-on-quarter (q-o-q), and by 1.9%, year-on-year (y-o-y). The GDP growth for the entire year 2016 was 2.3%.

Looking ahead the manufacturing business surveys look strong so far in 2017.


Back on the 10 th of January I highlighted this issue.

Consumer prices in December increased compared with November by 0.3%…….. The year-on-year growth of consumer prices amounted to 2.0%, i.e. 0.5 percentage points up on November. It is the highest year-on-year price growth since December 2012.

Well it isn’t the highest for that period anymore.

Consumer prices in February increased compared with January by 0.4%. This development was primarily due to a rise in prices in ‘food and non-alcoholic beverages’, ‘recreation and culture’. The year-on-year growth of consumer prices amounted to 2.5%, i.e. 0.3 percentage points up on January.

It was a grim month for healthy eaters in particular.

the increase in prices of vegetables by 15.2%, of which prices of potatoes rose by 24.1% and prices of vegetables cultivated for their fruit increased by 28.1%.

We are likely to see a fall in the annual rate in March if the experience elsewhere is repeated but none the less the objective has been reached.


The Czech economy is in good shape in many respects and quite a few countries would switch circumstances. Economic growth with a very healthy looking labour market although past central bankers might be wondering about responding especially with an interest-rate called “technical zero”. Added to this one could use the phrase “mission accomplished” on the inflation front so how do they respond?

sustainable fulfilment of the 2% inflation target in the future. Sustainable fulfilment of the target following the return to the conventional monetary policy regime is crucial for the timing of the exit from the exchange rate commitment.

The central planners fear an uncertain future and have got cold feet. The catch is that they are applying a very strong economic stimulus to an economy which is doing well so the policy is inappropriate also the countries the Czech Republic trades with will have good reason to wonder how much of the economic activity is being poached from them?

What is the exit strategy and will we see a Swiss National Bank style debacle?

House Prices

A familiar tale comes from the Global Property Guide.

Wow!  The average price of apartments in the Czech Republic surged by 11.87% (11.24% inflation-adjusted) during the year to Q3 2016, the country´s eleventh consecutive quarter of strong price hikes, according to the Czech Statistical Office (CZSO),


10 thoughts on “The currency peg problems of the Czech National Bank mount

  1. The Czechs seem to be bouncing quite happily, so to speak. But one wonders how long these figures can be sustained? My view is that although the Czechs are a very hardworking, inventive and skillful nation, this growth has been created artificially in part. Trying to keep parity with the Euro can backfire as the Swiss found out. If it goes wrong they only have themselves to blame. Puts me in mind of Suzanne Vega;

    Jack on the Queen, and the ten on the Jack.
    It’s a happy repetition.
    You and your fate in a kind of check-mate.
    And you are your only competition

    • According to trading economics, the average monthly gross wage is roughly 1080 euro per month. I have an 810 euro average nett wage elsewhere. German wages are nearly 4 times higher. So Czechs have a long way to go before their exchange rate hurts.

      Convergence is benefitting Eastern Europe

  2. Hi Shaun, This is just the kind of “black swan” event the media will cite…. Say French and or German elections produce an unexpected outcome, one that no one could have forseen! The Euro rocks and along with rock Swiss, Czech and nordics… I mean who could have realised all of these interconnections? (sarc)

    Paul C.

    • Hi Paul C

      Bloomberg View put it another way.

      “Small European Currencies Are Just a Headache”


      “For small European countries, joining the euro outright is a better idea than a peg. It makes sense to recognize that one’s biggest trade partners are in the eurozone and stop wasting energy on the maintenance of tiny currencies — the defense against speculators, the configuration of pegs, the painful consequences of their removal. ”

      That was the sort of logic that was perhaps applied to Greece…

      • in theory, there are borrowing limits by Euro treaty. In practice they are usually ignored without consequence.

        I regard Greece’s problems are primarily caused by spending more than they collect in tax. Deficits/borrowing is not a free lunch ….

  3. Great blog as always, Shaun.
    Further to your data on Czech house prices, the Czech residential property price index showed an annual increase of 6.9% for 2016Q3, up from 5.7% for 2016Q2, lower than the inflation rate for apartment prices you quoted, but still possibly a cause for concern. Strangely, this only translated into a 1.9% increase in the Czech quarterly owner-occupied housing price index (OOHPI) based on net acquisitions for 2016Q3, up from 1.0% for 2016Q2. If you look at the methodology document for the Czech CPI it is weird:
    The terminology “hypothetical rentals” implies that a rental equivalence approach is used in the Czech CPI for OOH, but they actually seem to use a net acquisitions approach as in the OOHPI they produce for Eurostat. If I understand correctly, housing prices only get about one sixth of the weight in the OOH series; unless the real estate market operates very differently there from the Anglosphere it looks like it is underweighted. Self-help family homes have a much higher basket share (about a quarter) than market-purchased homes.

    • Hi Andrew and thanks for the link

      I took a look at the pdf for the basket/weights for the CPI and it says that ordinary rents are 3.5% and Imputed Rents are 8.7% out of housing being 25.1% which agrees with your point of seemingly being underweighted. Yet as you say suddenly in the full document they have categories for different house prices so the Imputed/Hypothetical rents seem actually to be based on house prices.

  4. “how do the central planners return to free markets?”

    Have we ever had them over the last 30 odd years? Please let me know when that was.

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