Miroslav Singer: Clarity Is a Central Bank Virtue

2017-05-19 IMI

This article first appeared in OMFIF Commentary on April 26, 2017. Miroslav Singer is former Governor of the Czech National Bank and a Member of the OMFIF Advisory Board. He is Director of Institutional Affairs and Chief Economist at Generali CEE Holding. The Swiss franc has experienced major swings since its surprising and abrupt exit from the currency floor two years ago. Its exchange rate appreciated by more than 40% the first day after the exit, and many expected similar developments in the case of the Czech koruna. But the exchange rate of the koruna is experiencing a much more limited reaction after its exit from a similar floor, strengthening by just 1.6% against the euro. The previous upper limit for the currency’s appreciation, set at 27 koruna per euro, was lifted on 6 April. This low volatility is helpful for the real economy as it limits uncertainty for companies, investors and consumers, enabling them to consider purchases and investments more safely. This calm development of the koruna’s exchange rate is relevant for other central banks preparing their exits from unconventional monetary policies. This is particularly true since the end of currency interventions is often thought to be best prepared in secret. It is more relevant still in the light of the intervention data in the annual report published by the Swiss National Bank in March. Despite having the lowest policy rate in Europe (minus 0.75%), the Swiss central bank has been unable to prevent a slowdown of the pace of real economic growth by roughly one-third, nor has it avoided further interventions. The volumes of these interventions are close to those that forced the central bank to end the currency floor, harming both the real economy and its own credibility. The Czech National Bank used two main communication tools: a clear conditional indication of the period in which it expected the floor to end, and an unconditional promise to keep the floor in place for a promised period (until the end of the first quarter of 2017). As the promised unconditional end date remained unchanged through two monetary policy sessions, financial markets had a reliable signal that the end of the floor was approaching. The central bank’s transparency and clarity payed dividends. Though the volumes of currency interventions in the first quarter of this year were exceptionally high, the clear communication enabled the real economy to get ready for the change. Additionally, the communication provided clear insights into the central bank’s thinking on exchange rate developments since exiting the floor. This is borne out by a host of currency traders’ research backing the central bank’s line that the potential for a sharp strengthening is limited, since many corporate participants in the Czech market were already anticipating the exit. This calm departure (so far) from the floor valuably illustrates that the central bank of a smaller economy can effectively guide foreign currency markets. This is still the initial phase of the exit, and the koruna market may later react with more abrupt swings, but the likelihood is that the CNB will come out of this period with its credibility enhanced. This will increase the bank’s effectiveness in its future communication, bringing benefits to both financial markets and the Czech economy.

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Miroslav Singer: Clarity Is a Central Bank Virtue

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