Miroslav Singer: Gunning for intervention

Famed for his tough approach to regulation, Czech central bank head Miroslav Singer now has his sights set on currency market intervention to reflate the country’s flagging economy. He talks to Euromoney about the limitations of fiscal policy, the prospects for Czech adoption of the euro, and the dangers of regulatory integration.

Judging by the accuracy with which he doodles an automatic pistol on his notepad during the interview with Euromoney, Miroslav Singer is a man with experience of hitting his targets – an impression reinforced by his record at the Czech National Bank (CNB).

In his eight years there, first as vice-governor and then as the central bank’s head, Singer has played a key role in ensuring the stability of the Czech financial sector – currently one of the most profitable in the whole of Europe – and helping to keep the country’s economy on an even keel through the global financial crisis, the eurozone meltdown and numerous domestic changes of government.

Now, with his sights set on central bank intervention to weaken the Czech koruna, and despite resistance from within the CNB board, many analysts are betting that the governor will once again hit his target.

Singer has been making the case for currency market action since last autumn as interest rates in the Czech Republic approached the zero bound – which they reached in November – and has stepped up his rhetoric in recent months as returning growth has failed to translate into reflationary pressures.

Czech central bank head Miroslav Singer
Czech central bank head Miroslav Singer
Even under the CNB’s latest GDP forecasts, which envisage a fairly dramatic recovery from a contraction of 1.5% this year to 3.3% growth by 2015, consumer price increases are expected to remain below the bank’s target range of 1% to 3% over its 18-month time horizon.

What is more, notes Singer, the current projection already envisages further monetary easing – which means that without it there is a real risk that the Czech Republic might experience Japanese-style deflation. "That is not our baseline scenario," he adds, "but effectively the model works with interest rates significantly below zero, which means it works with the assumption that a further policy relaxation will come."

At the root of the problem are a lack of consumer confidence, spare capacity in the economy and stable energy prices. Singer explains: "Wage growth is currently very moderate, individuals and firms are being very conservative in their purchase decisions, and we are working significantly below the output limits, plus worldwide energy prices are definitely not rocketing and this year’s harvest looks to be better than last year’s below-average one."

Under these circumstances, he argues, the only way inflationary pressures are going to emerge in the Czech economy "is if we create them". Unfortunately for the CNB, however, the options for doing so using what Singer describes as "the more normal parts of the monetary policy toolbox" are limited – as he notes, the already highly liquid and well-capitalized nature of the country’s financial sector mean US and UK-style asset purchases would have little effect.

That leaves FX intervention as "almost the only viable option", says Singer, adding that it would also have the benefit of supporting the country’s large export sector – although he stresses that this is not a direct concern for the CNB’s board.

"A weaker koruna will simply import inflation," he insists, "and that’s a healthy thing in an economy in which part of the weakness in retail activity and even investment is due to the postponement of purchases from speculative motives.

"Of course, the weaker currency will give even more comfort to exporters, which in turn will help reassure workers that they will keep their jobs and the government that tax income will be maintained. But overall our job is to meet our inflation target – we are not here to help exporters."

As to what level for the koruna might achieve these objectives, Singer refuses to be drawn, but analysts suggest his target is likely to be in the region of Kc26.5 to the euro, given that the exchange rate has already tested the Kc26/€ level several times this year. Indeed, some question the necessity for physical market action, given the substantial weakening of the currency since talk of intervention began in earnest.

Singer, however, is unconvinced. "I think most of us on the board would agree that, if you had told us nine months ago we could keep the rate relatively close to Kc26/€ with verbal intervention alone, we would have found that scenario far-fetched," he admits. "Nevertheless, I still think that further policy relaxation is going to be needed, and for that we will have to provide the real thing."

Whether he will be able to persuade a majority of his fellow CNB board members of the necessity for intervention at their next meeting on September 26 remains to be seen, but he has clearly already made considerable progress in that direction.

Vice-governor Vladimir Tomsik expressed his readiness to consider intervention as early as January, while Lubomir Lizal added his support in June, bringing the number of doves to three. Of the seven-member board, a further three – Pavel Rezabek, Kamil Janacek and Eva Zamrazilova – are dedicated monetary hawks, which leaves one potential swing voter, Mojmir Hampl.