Czechs Recoil From Swiss Inspiration After Franc Shock

(Corrects reference to foreign-currency purchases in 13th paragraph.)

(Bloomberg) — The Czech central bank just lost a role model.

Policy makers in Prague cited Switzerland as inspiration when they imposed a cap on gains for the koruna in November, 2013. Any further influence ended when the Swiss National Bank abandoned its limit on the franc this month, rocking currency markets and triggering billions of dollars in losses for investors.

With countries across eastern Europe searching for ways to contain the turmoil, the Czechs are reinforcing a yearlong media offensive to emphasize that scrapping their currency controls will be a smooth process. The regulator has pledged to keep the cap in place amid falling oil prices and a worsening euro-area economic outlook. The bank wants to prevent swift koruna gains after the currency is allowed to float freely again so it won’t undo its efforts to fend off deflation.

“The way of exit that we have been communicating for more than a year is quite different from the way the Swiss left,” Czech central bank Governor Miroslav Singer said in a Jan. 21 interview in Vienna. “Our idea is a more predictable and mainly non-volatile exit.”

The Swiss franc soared as much as 41 percent against the euro and strengthened against other currencies after the Swiss National Bank scrapped the three-year-old policy on Jan. 15. The Czechs will try to prevent similar gains in the koruna, which is 7.4 percent weaker than before the central bank set its cap in November, 2013. It has lost 0.7 percent this year, trading at 27.884 to the euro as of 6:08 p.m. in Prague Tuesday.

‘Swiss Path’

The Swiss National Bank’s decision came just three days after Vice President Jean-Pierre Danthine said the franc ceiling needed to “remain the pillar” of monetary policy. His boss, Thomas Jordan, said Jan. 5 the cap was “absolutely central” for the Swiss economy.

The Czech regulator studied the monetary policies of other countries facing zero or near-zero interest rates before introducing its “modification of the Swiss path,” Vice Governor Mojmir Hampl said in a presentation in March last year.

Having little room for further cuts after reducing their main interest rate to 0.05 percent in 2012, the Czechs imposed a limit on koruna gains at “around” 27 a euro. It also ramped up efforts on managing market expectations by harnessing communication as a policy tool to send a clear message.

Unified Voice

“In the past, board members presented their opinions in a slightly different way, but now the message is more unified,” Michal Brozka, chief analyst at Raiffeisenbank’s Czech unit, said by phone on Monday. “The CNB is a credible bank, but still, they can’t totally rule out that the market will be surprised by their moves.”

The Czechs provide guidance on a possible exit from the currency control through its price growth forecasts and assessment of inflation or disinflation risks attached to them.

The central bank reiterated on Dec. 17 it plans to keep using the koruna cap until at least the first quarter of 2016, when its sees inflation accelerating toward its 2 percent target.

It will abandon the regime only when the economy is strong enough to generate “sufficient and stable” inflationary pressure within the tolerance band of 1 percentage point above and below the inflation goal, Vice Governor Vladimir Tomsik said in an interview published by Lidove Noviny newspaper Tuesday. Board member Kamil Janacek said the same day that the exit will be “transparent” and won’t resemble Switzerland’s.

Below-Target Inflation

The Czech National Bank endured criticism by President Milos Zeman, who picks central bankers, as well as trade unions, importers and even some exporters who lost money on currency hedges in the 2013 intervention. Leading the decision to buy $10 billion of foreign currency, the equivalent of about 5 percent of the country’s gross domestic product, Singer was dubbed the man who “made everything more expensive” by the main tabloid, Blesk.

The central bankers have repeatedly defended the decision, arguing that weakening the currency was the proper way to boost domestic demand, fend off deflation, and help the country recover from a record-long recession.

The economy grew four consecutive quarters through September, driven by household consumption and investment, after six annual contractions in a row. Even still, falling oil prices helped mute December consumer price growth to 0.1 percent from a year earlier, 0.5 percent below the central bank’s forecast.

Singer said Jan. 13 he sees no need for a “quick” reaction to declining oil prices, comments that reversed koruna losses from earlier in the year that were fueled by speculation that slowing inflation may prompt the central bank to move the koruna cap to a weaker level.

Scrapping Limit

Policy makers have repeatedly said they don’t expect the koruna to appreciate to levels seen before the 2013 intervention after the currency cap is removed.

When the central bank moves closer to scrapping the koruna limit, it will probably resume publishing its koruna exchange- rate forecasts to influence investors’ expectations, said Jaromir Sindel, an economist at Citigroup Inc. in Prague.

“The CNB faces a choice of exit scenarios: it can either gradually lower the EURCZK floor or actively smooth the EURCZK after the exit, or use a mix of both courses,” Sindel said in a Jan. 16 report. “While these scenarios would likely not prevent short-term abrupt appreciation, this would be temporary and the koruna would avoid immediate, longer-lasting, larger appreciation after the exit.”

–With assistance from Andrea Dudik in Prague.

To contact the reporters on this story: Lenka Ponikelska in Prague at [e-mail]; Peter Laca in Prague at [e-mail] To contact the editors responsible for this story: Balazs Penz at [e-mail] Peter Laca, Michael Winfrey