The CNB, which has cut its 2-week repo rate by 125 basis points this month to 1.0 percent, said it was prepared to lower interest rates further and while the banking sector is still robust, it was ready to adopt other measures to tackle any liquidity problems in the financial sector.
"The coronavirus infection and the related measures will lead to a "strong recession," in which the domestic economy will remain for the rest of this year," CNB said in a presentation, adding this would have a "pronounced anti-inflationary effect."
Armed with an extraordinary internal update of its economic forecast, CNB said global and domestic measures to counter the spread of the virus will lead to a downturn in the country's economy and inflation, warranting the cut in interest rates that will help support the economy from the shock.
But this sharp fall in economic activity will have an adverse effect on banks' loan portfolios and CBN said it was ready to fully scrap the countercyclical capital buffer if banks' losses were to rise unexpectedly.
However, the gradual release of the capital buffer along with the postponement of dividend payments will help support banks and as a whole, CNB said the banking sector can cope with the consequences "of even significantly adverse economic developments."
On March 16, when CNB cut its rate for the first time this month, it also revised an earlier decision to raise the countercyclical capital buffer and kept it at 1.75 percent. It also said it was ready to release the buffer if losses in the banking sector were to rise unexpectedly.
In addition to banks, CNB expects insurance and pension companies to refrain from paying out dividends or taking any other steps that might jeopardize the institutions' resilience.
"This should happen with immediate effect and last until both the acute and longer-term consequences of the novel coronavirus pandemic fades away," CNB said about the dividends.
The Czech koruna has fallen sharply since mid-February and this will partly offset some of the decline in economic growth and inflation.
However, the impact of this fall probably won't materialize until the situation returns to normal, CNB said, adding it is ready to react to "excessive exchange rate fluctuations" and "any monetary policy measures may be adopted at any time as needed, even at an extraordinary monetary policy meeting of the Bank Board."
After rising to 24.9 against the euro by Feb. 18, the koruna tumbled 10 percent to March 23. Since then it has rebounded and rose further in response to today's policy decision to trade at 27.2 to the euro, down 8.6 percent this year.
During five years of extraordinary easy monetary policy between November 2012 and August 2017, the CNB not only kept its key rate at a rock-bottom 0.05 percent but also intervened in the foreign exchange markets to keep the koruna from rising against the euro as an additional tool of monetary easing.
As a first step toward tightening its policy, CNB in April 2017 scrapped its commitment to keep the koruna below 27 to the euro.
The spread of the coronavirus has forced CNB into an abrupt U-turn in its policy stance. From August 2017 to February this year it raised rates 9 times by 220 basis points until it reversed course and cut the rate 50 basis points at an emergency board meeting.
The Czech National Bank issued the following statement:
"At its meeting today, the Bank Board of the Czech National Bank unanimously lowered the two-week repo rate by 75 basis points to 1.00%. At the same time, it lowered the Lombard rate to 2.00% and the discount rate to 0.05%. The Bank Board decided to cut interest rates further in reaction to the expected impacts of the coronavirus pandemic on the Czech economy.
The impact of the coronavirus pandemic dramatically changes the current outlooks for the global and Czech economy. The measures to stop the coronavirus pandemic adopted by individual governments are having a very negative effect on global trade and the production and consumption patterns of economic agents. The rapid changes in the situation imply huge uncertainty in the creation and updating of outlooks. Any point estimates of future developments should therefore be regarded as highly uncertain in the current situation. For its March monetary policy meeting, however, the CNB Bank Board had at its disposal an extraordinary internal update of the macroeconomic forecast, which served as a basis for its decision. It was complemented by additional relevant analyses and considerations from the financial stability area and information about the situation in each segment of the financial market and financial sector.
The expected significant decline in foreign economic activity and inflation alone would have a strong impact on the Czech economy. Beyond that, however, the measures taken by the Czech government to counter the spread of the coronavirus are also having extraordinary direct demand and price effects on the domestic economy. All this will lead to a downturn of the Czech economy and a decline in inflation. The drop in external demand and the impacts of domestic measures will result in a strong domestic recession, in which the Czech economy will probably remain for the rest of this year. This will have a pronounced anti-inflationary effect. The koruna exchange rate, which has depreciated significantly as a result of the worse economic outlook and financial market panic, will partly offset the anti-growth and anti-inflationary impacts of the coronavirus pandemic. However, its impact probably will not materialise to a larger extent until after the situation returns to normal. Despite the markedly weaker exchange rate levels, these developments overall warrant a significant reduction of interest rates this year. This, in combination with the government's budget policy measures and the favourable supply-side effect of the drop in oil prices, will support the recovery of the economy from the current shock after the quarantine measures are relaxed.
The Bank Board confirms that the capital position of the domestic banking sector is currently robust thanks to capital buffers and voluntary capital surpluses. The banking sector as a whole can cope with the consequences of even significantly adverse economic developments. However, owing to the coronavirus contagion and the related preventive measures, economic activity will significantly deteriorate during 2020. This is highly likely to have an adverse effect on the quality of institutions' loan portfolios. In this situation, a gradual release of the existing countercyclical capital buffer is one of the measures that - in combination with the postponement of dividend payments announced by banks - can support banks' ability to finance the real economy without interruption. Therefore, the CNB Bank Board lowered the countercyclical capital buffer rate to 1.00% with effect from 1 April 2020. The CNB remains ready to release the buffer fully were the banking sector's unexpected losses to rise.
Due to the high uncertainty regarding future economic developments, the CNB also expects in the current situation that not only credit institutions, but also insurance companies and pension management companies will refrain from making any dividend payouts or taking any other steps that might jeopardise individual institutions' resilience. This should happen with immediate effect and last until both the acute and longer-term consequences of the novel coronavirus pandemic fade away.
In view of the extraordinary nature of the present situation, the Bank Board announces that it is prepared to lower interest rates further and adopt measures to address any potential liquidity problems in the Czech financial sector. The CNB will continue to act within the boundaries of its legal mandate. However, the Bank Board is convinced that broadening the CNB's range of financial instruments and eligible counterparties would significantly help to maintain financial stability.
At the same time, the Bank Board emphasises that the CNB stands ready to react to any excessive exchange rate fluctuations using its instruments, in line with the managed float exchange rate regime. Any monetary policy measures may be adopted at any time as needed, even at an extraordinary monetary policy meeting of the Bank Board."
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