CNB's Holub about negative rates: Never say never

With the exception of Hungarian forint that strengthened quite sharply already on Tuesday, the Central European currencies posted solid gains against the euro yesterday. The EURCZK pair therefore again approached its threshold set by the Czech National Bank (CNB), i.e. EURCZK 27.0.

Regarding the koruna, its recent appreciation already induced some reaction from the CNB. Specifically, Tomas Holub, the Chief of CNB’s Monetary Department, official, said in an extensive interview that he could imagine – if necessary with respect to reaching its inflation target – yet another extension of the intervention regime. Apart from that, he said that although it was not the most imminent question at the moment, the bank does not exclude possibility to use other “unconventional” policy tools. What did he mean?

The next unconventional instrument that the CNB could use to mitigate pressures on further appreciation of the koruna is cutting official interest rates below zero. Let us recall that the CNB base rate is currently at 0.05%. Mr. Holub however indicated that the discussion has so far been held rather on a theoretical level and that the primary ‘monetary policy’ instrument remains the exchange rate. He added that while talking about negative rates, the board members agree that they should keep the possibility to cut (repo and depo) rates below zero if necessary.

Despite the overall dovish tone of the interview, the koruna remains in sight of EUR/CZK 27.0. On the other hand, the reaction of the Czech bond market was quite visible – the yield of 2Y government bond has fallen well below zero today in early trading (see the chart below).