The Czech National Bank (CNB), which earlier today cut its benchmark interest rate for the second time this month, lowered its countercyclical capital buffer for banks by 75 basis points to 1.00 percent to “support banks’ ability to finance the real economy without interruption.”
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: