Czech central bank may discuss further use of FX reserves to slow inflation

PRAGUE (Reuters) – The Czech central bank may discuss whether to use its large foreign exchange reserves to not only stabilise exchange rate fluctuations but also for fighting inflation, central bank Governor Jiri Rusnok said on Sunday.

The bank started buying crowns in the market on March 4 to halt a drop in the currency caused by investor flight after Russia’s attack on Ukraine.

It does not have any target rate nor volumes, and said its action was aimed at unjustified currency weakening. The currency has regained nearly all losses versus the euro since the start of the Russian invasion on February 24.

Rusnok, however, said on Sunday the bank may discuss further using its large reserves accumulated in 2013-2017 — when the bank intervened to weaken the currency — to help bring inflation under control.

“Now we have to talk further about further steps, whether we perhaps want to temporarily strengthen the crown not only for the reason of stability, but perhaps also to actively use the exchange rate as an anti-inflationary tool,” he said.

“But it is necessary to lead a debate on that and it is quite a complicated issue. But I cannot exclude it for myself.”

Rusnok also said inflation shocks together with the war in Ukraine may bring Czech economic growth to zero by the end of the year and a European recession cannot be excluded.

The central bank has been faster than most others in hiking interest rates since last year, taking the main repo rate to 4.5% and signalling further increase.

It held 157.46 billion euros in foreign exchange reserves as of the end of February, equal to about two thirds of the country’s gross domestic product.

(Reporting by Jan Lopatka, Editing by Michael Kahn)