Bank’s foreign exchange interventions criticised

The Czech National Bank (ČNB) has decided to use the exchange rate as an instrument of monetary policy, weakening the Czech crown against the euro. Although the aim of these interventions has been to maintain price stability, both employers and trade unions have criticised the ČNB’s decision. Unions say the price of imports will rise, hitting low- and middle-income households. Employer groups are worried about the effects on long-term economic stability.

Background to change in exchange rate

The board of the Czech National Bank (ČNB) has intervened in the country’s monetary policy. At its meeting on 7 November 2013, the board stepped in to devalue the country’s currency, the Crown, against the euro.

The exchange rate now stands at CZK 27 to the euro. Between March 2010 and the bank’s intervention, the exchange rate had ranged between CZK 24 and CZK 26 to the euro.

The ČNB said it had a legal obligation to ‘forestall the risk of deflation and maintain price stability’ in line with the amended Act No. 6/1993 Coll., on the Czech National Bank (149KB PDF). Since the autumn of 2012, the ČNB has said it was ready to use its powers to ease monetary conditions. The Czech crown weakened in late 2012 and early 2013, quite soon after the governing board’s decision to set the exchange rate was announced. This helped slow down the disinflation trend.

According to the ČNB, the effects of the recession and downturn on the labour market have taken too long to subside. Their anti-inflationary effects have led, along with a decline in prices of raw materials and energy, to a further reduction in the inflation rate. The ČNB is trying to avoid this trend and to combat looming deflation that could significantly undermine the Czech economy.

Although the ČNB has the power to use the exchange rate as an instrument for ensuring price stability, the move has not been altogether popular and has provoked resentment.

Unions and employers oppose the change

The Czech-Moravian Confederation of Trade Unions (ČMKOS) is the largest union confederation in the Czech Republic. It says the ČNB’s interventions on the financial market to weaken the Czech crown by buying foreign currencies is problematic. ČMKOS argues that this will particularly hit low- and middle-income households, because it will inevitably increase the cost of imports such as electronics, certain foodstuffs such as fruit, and other goods.

The employers are not happy with the ČNB’s move either. They agree monetary interventions will promote exports, but this will be cancelled out by the increased price of imports such as fuel and raw materials.

The Confederation of Industry of the Czech Republic (SP ČR) has said that the ČNB’s foreign exchange interventions are not unambiguously positive. Before making decisions about monetary interventions, it said, the ČNB should consult the business sector’s representatives so that it can use their practical experience and take into consideration the potential impact on companies.

SP ČR says employers need long-term continuity and stability in the decision-making process that shapes the business environment. Foreign exchange intervention goes against this principle and raises concerns about the post-intervention period and exchange rate volatility in the future. The Czech Republic’s business groups believe that adopting the euro is still the basic and most effective policy tool to counter financial volatility.

Bank explains its position

In an effort to bring clarity to the situation, the ČNB organised a meeting with representatives of the employer groups to explain its reasons for devaluing the currency.

While SP ČR continues to oppose the move, Petr Kužela, President of the Czech Chamber of Commerce (HK ČR) said after the meeting that some companies do perceive the ČNB’s intervention as necessary in the long run.

Soňa Veverková, Research Institute for Labour and Social Affairs