The CNB faces the dilemma of penalising its banking systems by imposing a negative deposit rate.
For Czech banks, the current interest rate policy is of extreme importance given the amount of excess CZK liquidity (EUR 42 billion, equivalent to a quarter of the annual GDP). Until recently, Czech National Bank (CNB) representatives seemed comfortable with FX flows, since shallow Czech financial markets act as a barrier against excessive speculative FX positions.
However, two recent developments tested the CNB’s comfort. The first was the prospect of the ECB cutting its deposit rate deeper below zero, intensifying capital flows into CZK assets. The second was an increasing sovereign bond issuance activity since the start of 2016. A higher volume of outstanding bonds reduces the cost of long CZK positions, going against the CNB’s objective. A halt in bond issuance in March suggests some coordination between the two state institutions.
UniCredit economists still believe that the chances that a negative deposit rate will be introduced remain below 50%. Should the CNB go that way, they expect a two-tier system similar to that mulled by the ECB. Even this solution would affect the liquidity of the Czech financial market as well as the banks’ profitability.
Contact:
Pavel Sobisek, Chief Economist UniCredit Bank Czech Republic, Pavel.Sobisek@unicreditgroup.cz and
Patrik Rozumbersky, Economist UniCredit Bank Czech Republic, Patrik.Rozumbersky@unicreditgroup.cz