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Czech Republic likely to benefit from ECB economic boost, euro exchange rate bolstered

Photo: adamr / FreeDigitalPhotos.netPhoto: adamr / FreeDigitalPhotos.net The European Central Bank’s move to earmark 1.2 billion euros for buying bonds held by governments and financial institutions exceeded market expectations for the size of the possible cash injection last week.

The move should boost economic growth in the following way: the ECB will directly buy bonds which are currently difficult to sell and in this way provide cash to banks which can in turn lend it on the customers. At is most basic, the central bank is swopping money, a pretty liquid asset which it can print itself, for less liquid assets which will go onto its balance books.

The policy has been followed by the US, Japan, and Britain, and is very much the last tool in the toolbox for central banks when all the other options have run out to boost growth. The jury still appears to be out whether this is the best way to combat deflation and foster growth.

For the Czech Republic, and in particular the Czech National Bank, the ECB move should have several implications. In the immediate aftermath of the move the crown strengthened against the euro. By Monday January 26 it has firmed further, thanks in no doubt to the fears produced by the Greek election results, and was around the levels seen before it was buffeted on the currency markets two weeks ago. The weakening of the euro should in theory be felt for the foreseen duration of the European ‘Quantitative Easing’ until September 2016.

That should help the Czech National Bank keep to its 27 crowns a euro exchange rate target. A sudden weakening of the Czech crown at the start of the year against both the euro and dollar was partly based on the fears that the euro target would be shifted to 28 crowns or an even lower rate. And Czech National Bank governor Miroslav Singer has also said in an interview published with the Slovak business daily Hospodá?sk? Noviny on Friday that the 27 crown target rate could be extended for even longer beyond the initial termination date at the end of 2016.

Both the European and Czech central banks are largely reading off the same page at the moment. They both a target for inflation at around 2 percent but the current levels are barely above zero and only expected to climb very gradually. If anything, some analysts say that the Czech National Bank is taking a more upside view of the benefits of easing oil prices, that are contributing to low inflation, than the ECB.

Good news from the ECB move is likely to be that the Czech Republic will gain from the extra growth and higher inflation that should result in the euro-zone. It looks like Prague will again piggy back on the growth efforts of others, a bit like when incentives to scrap old cars and buy new were launched by most major European economies during the depth of the 2008 recession and Škoda Auto emerged as one of the winners. Around 60 percent of all Czech trade is with the euro-zone, so any pick up there feeds through more or less automatically to the local economy.

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