The Czech National Bank’s Role Since the Global Crisis

Abstract

The Czech economy entered the global crisis with no major imbalances. Importantly, it did not suffer from the FX mortgage problem, unlike its regional peers. This was mainly a reflection of its early disinflation process accomplished under the inflation targeting regime from 1998. As a result, the CNB could allow the exchange rate to operate freely as a shock absorber during the crisis. The sharp depreciation of the Czech koruna from mid-2008 until early-2009 helped to ease the overall monetary conditions significantly, together with sharp interest rates cuts from August 2008. As a result, the CNB did not hit the ZLB constraint and got by with standard monetary policy tools in the post-Lehman phase. In 2012–2013, however, the Czech economy slid into another recession driven by very weak domestic demand. The central bank cut the interest rates further and hit the “technically zero” level in November 2012. To achieve further monetary policy easing, the CNB used forward guidance on the nominal interest rates, and established an exchange rate commitment at CZK/EUR 27 one year later. This policy measure has averted the risk of deflation driven by insufficient demand, and has contributed to a notable recovery of the Czech economy.