Currency depreciation is step for us or against us?

Posted by admin 02/12/2013 at 19h36

 

In the scenario, the exchange rate of the Czech crown shifts close to CZK 27/EUR and is thus much weaker than in the baseline scenario. The weaker exchange rate level is reflected in an increase in import prices, which pushes up both headline and monetary-policy relevant inflation. This is followed by faster resurgence of inflationary pressures from the domestic economy. Inflation thus returns to the CNB’s target in 2014, then moves into the upper half of the tolerance band around the target and approaches the target slowly from above during 2015. The temporary overshooting of the inflation target in this scenario offsets the significant undershooting in 2013 and 2014 and facilitates an exit from the zero lower bound on interest rates through a decline in real interest rates. Turning to GDP, there are several contrary factors fostering a recovery in economic activity overall in 2014 and, by contrast, reducing economic growth in 2015. At its monetary policy meeting on 7 November 2013, the Bank Board decided unanimously to leave the two-week repo rate unchanged at 0.05 %. Interest rates will be kept at their current levels (i.e. at “technical zero”) over a longer horizon until inflation pressures increase significantly. The Bank Board also decided to start using the exchange rate as an additional instrument for easing the monetary conditions. The CNB will intervene in the foreign exchange market to weaken the Czech crown so as to maintain the exchange rate of the Czech crown against the euro close to CZK 27/EUR. Owing to this decision, the scenario of using the exchange rate has become the most likely description of expected future economic developments.

According to many economic experts, currency depreciation is a wrong step, because Czech economy has slightly started to recover in recent months. President Miloš Zeman and last president Václav Klaus identify themselves with these statements and they also don´t agree with interventions of ČNB. Václav Klaus, who appointed members of the Bank Board, said that ”interventions have very questionable effects, but very disputed costs”.

According to the Bank Board this step is appropriate and in case of monetary policy inaction, the economy would revive considerably slower.

Experts’ criticism on the head of CNB is based on the argument that the central bank wants “to encourage shopping spree” by this abrupt rise in the price because it declares that it won't be cheaper in the future. Economists, however, are not sure who has to start spending, because people with above-average incomes will not be affected by rise of goods around 4%, they will still shop as always. A further group are households that have problems with their incomes and live from paycheck to paycheck, or living on loans or reserves (according to statistics, there are around 40 % of them). For these households CNBs statement is meaningless, since they are not forming any savings. Other households won’t also start to shop from the Czech National Bank anticipated reserves, but only hasten Christmas shopping, as for example in electronics stores there are still same prices, but it doesn’t mean that they are shopping this way all year.

Companies are feeling uncertain, since they don’t know whether the interventions will be mitigated or even pass away. However, the CNB currently doesn’t intend to change its decision, because it is expecting increase of economic growth, which should help to save the jobs of people that due to the price level they were supposed to loose, if CNB didn’t make this intervention. Decline in prices of purchased goods and services, which is at the level of individuals as consumers seemingly positive fact, is at the level of the national economy extremely harmful and unwelcome phenomenon. However, many businesses are dependent on imported goods and raw materials from abroad and therefore these items will become more expensive for them and they will be forced to lay off.

An ordinary consumer won’t notice any change in price within cheap goods. The largest price increase will be visible mainly in expensive goods. In the price of a new car from abroad, for example around half a million Czech crowns, consumers may notice a rise.

For example: “I want to buy a new car for 20,000 €. In the original rate (25.8 CZK ) it should cost about 516,000 CZK. In the new rate (27 CZK) it will be about 540,000 CZK. The difference is 24,000 CZK.” explains economist at Credit Home Michal Kozub.

Next ugly aspect of currency depreciation for households is exchange crowns to the euro. For example: when I want exchange 10,000 CZK-in the original rate (25 CZK) I get 400 €. In the new rate (27 CZK) I get only 370 €. There is difference 30 € = 800 CZK.

Opinions of experts on this issue are radically different and only result of growth of the Czech economy will actually prove if CNB had the correct assumptions.

 

no comments

Comments

(leave url/email »)

   Comment Markup Help Preview comment