Czech Republic

The Czech National Bank turns hawkish


Hungary

Households started to repay their debt in December despite the weaker currency


Poland

The NBP rate decision will be a very close call this month...


The Week Ahead

NBP will focus on the economy and cuts rate further, no matter what the PLN is doing


Overview

Why intervention makes sense in Czech and Polish case

The life of Eastern European markets is no bed of roses nowadays. Appearing almost every day on the front pages of dailies such as the Financial Times or Wall Street Journal in a negative context does not do those markets credit. Bear in mind that the main message from the western financial media is that Eastern Europe is on the threshold of an enormous financial crisis similar to that of 1997 in Asia. This leads to capital outflows in the Asian manner too, when investors view the region as a block, and are reluctant to keep assets that even only slightly smell of Eastern Europe. The results of capital flight are also modelled after the fashion of Asia, i.e., even currencies with relatively favourable fundamentals, such as the Polish zloty or the Czech koruna, have been hit by massive sell-off.

So far, we have asserted that the Czech and Polish economies, given their relatively small debts in foreign currencies, may actually profit from such depreciation. While currency depreciation will improve the competitive ability of certain products, we admit that depreciation of that magnitude does not necessarily have only positive implications for the Polish and Czech economies. Indeed, numerous Polish or Czech exporters have been hedged against currency fluctuations at less favourable levels, and these exchange rate losses now force banks tighten their credit conditions for those firms.

Under these circumstances, a forex intervention, like the one carried out by the Polish Ministry of Finance in recent days, may be quite a good idea. An intervention on today’s shallow market may not only be quite successful, it could also be a win-win situation for government authorities; on the one hand, it would give part of the corporate sector relief and, on the other hand, the State would get rid of forex reserves under market conditions of which they could only dream until recently.