Compliance in Progress Summary

The most recent comprehensive account of the Czech Republic’s performance against monetary policy transparency standards is a report published by Oxford Analytica (OA) in 2006. It delivers an overall rating of "compliance in progress," unchanged from the previous year. The Czech National Bank (CNB) provides extensive, detailed, high-quality publications and online public access to information, including same-day voting ratios of CNB board meetings. Some suggestions for improvement made by the OA report, such as.broader access to actual board voting records and published exchange rate forecasts, have been implemented. OA praised the cooperative relationship between the CNB and the Ministry of Finance, noting that this should help insulate the two institutions from political influence. The Special Data Dissemination Standard (SDDS) website of the International Monetary Fund discloses that the Czech Republic meets or exceeds SDDS requirements regarding the timeliness, coverage, and periodicity of its posted monetary data, offers advance release calendars for all data categories, provides simultaneous release of data, and meets expectations regarding public access to data.

General Overview

The most recent comprehensive analysis on the Czech Republic’s adherence to international monetary policy transparency standards was completed by Oxford Analytica (OA) in 2006. OA gave a rating of "compliance in progress" (p. 93) for the Czech Republic’s overall performance, unchanged from the previous year. According to the OA report, "the Czech National Bank (CNB) plays a leading role in the region in terms of monetary transparency" (p. 93), evidenced by extensive, detailed, high-quality publications and online public access to information, including same-day voting ratios of CNB board meetings. However, OA suggested that there was still room for improvement. Broader access to actual board voting records could be offered, for example. At the time of the report, however, Czech authorities resisted this suggestion, apparently concerned with the possibility of causing market confusion. Nevertheless, since the publication of this report, CNB’s authorities have begun the practice of identifying the votes of each individual CNB board member following meetings. Furthermore, at the time of the OA report there was a trend toward greater detail in the published information on interest-rate trajectories. This trend toward greater openness has since continued, with quarterly Inflation Reports now containing exchange rate forecasts. OA praised the cooperative relationship between the CNB and the Ministry of Finance (MoF), noting that this should help insulate the two institutions from political influence.

The OA report added that the CNB's mandate was extended in April of 2006 to include oversight of the financial sector, comprising banking, insurance, and the capital markets. OA argued that this consolidation could "improve communication between regulated entities and the supervisory bodies" (p. 93), although it added that some observers would have preferred oversight to be carried out by an entity that was independent of the CNB. The reasons for this preference were that such an arrangement would be more transparent and accountable, and the new oversight responsibilities might detract from the CNB's ability to focus sharply on monetary policy. The OA report also noted that the 2006 Czech elections have affected the country's timetable for euro-adoption, causing an unspecified delay in the scheduled entry into the Exchange Rate Mechanism II (ERMII). The global financial crisis of 2008 and subsequent exchange rate volatility have convinced the CNB and the MoF to avoid setting a target date for euro adoption, according to the International Monetary Fund’s (IMF) 2008 Article IV Consultation report.

The 2008 Article IV Consultation report (published in April 2009) provides further details on the Czech Republic’s monetary response to the economic difficulties of 2009. While growth was forecast in the report to be 1.5 percent for the year, a December 2009 review of the IMF website revealed that this figure has been revised downward to -4.3 percent. The website also forecasts inflation rates of 1 percent and 1.1 percent, respectively, for 2009 and 2010. This lower inflation rate has made room for further monetary easing, according to the Article IV Consultation report. In February 2008, the CNB’s policy rate stood at 3.75 percent. Subsequent strengthening of the koruna and a weakening economy caused the central bank to slash interest rates to 2.25 percent by the end of the year. The IMF urged the CNB to leave open the possibility of further cuts in case economic conditions deteriorate even more.

The IMF's Special Data Dissemination Standard (SDDS) website discloses that the Czech Republic has been a member since 1998 and first posted its metadata in 1999. According to the website, the Czech Republic posts monetary data that meets or exceeds all SDDS requirements for coverage, timeliness, and periodicity, and meets the requirements regarding advance release calendars, simultaneous release, and public accessibility.

The Principles

FCClarity of roles, responsibilities and objectives of central banks.

The 2006 OA assessment awarded a rating of "full compliance" (p. 94) for this principle. The CNB's monetary policy mandate is established in the 1992 Czech Constitution and the 1993 Act on the Czech National Bank. The latter Act has undergone several modifications to bring it into broad compliance with the acquis communautaire of the European Union (EU). This and other efforts to harmonize with the EU's regulatory structure are motivated by the Czech intent to adopt the euro. Both the Constitution and the CNB Act establish the central bank's primary goal as price stability, in the context of contributing to sustainable economic growth. The CNB's principle tool is inflation targeting, set at 3 percent annually, plus or minus 0.1 percent. Certain situations –natural disasters, exogenous price shocks, exchange-rate fluctuations driven by external events, et al. – are specified in law as permitting the CNB to temporarily deviate from its inflation targeting policies.

In addition to monetary policy, the CNB is responsible for currency issuance and circulation, managing the interbank payment and clearance systems, and overseeing the banking sector. Changes to the CNB Act in 2006 added oversight of the insurance and capital markets to the CNB's mandate. The Act also provides a guarantee of CNB operational independence from the executive and legislative branches of government. It sets term limits (six years) on board members. It requires that activities not expressly covered in the Act must be authorized by Parliament. According to OA, "the only area of shared responsibility has to do with the establishment of the exchange rate regime, but the government has no impact on the day-to-day management of the exchange rate" (pp. 94-95). The exchange rate system is governed by provisions contained in the Foreign Exchange Act of 1995. The law requires cooperation between the CNB and the MoF, and the latter is allowed to attend board meetings of the central bank in an advisory role, but cannot be present for votes. The CNB's governor or deputy is allowed to attend meetings of the cabinet. The MoF is provided with CNB reports monthly, and provides general advice to the government on matters touching upon monetary and banking-sector issues.

The OA report noted that "the CNB has adopted a cautious stance on Czech euro membership" (p. 95) and participates actively in policy debates, including open criticism of government actions. Board appointments are generally free of political manipulation. The law requires that members are appointed by the Czech president, who announces his choice(s) five days prior to the end of the terms of members being replaced. In 2004 and again in 2006, concerns were raised that the newly elected president (Vaclav Klaus) might attempt to politicize the board through his appointments, but OA found that such fears have not been borne out by experience. While political appointees might exert some marginal influence on the board, the OA report cited the rules-based process by which the CNB makes policy as providing protection against any major disruptions. Nonetheless, observers were cited by OA as suggesting that a change in the board appointment process might enhance transparency, such as by including the parliament in the selection process, or by requiring nominees to be announced further in advance of the end of current members' terms. The OA report noted that, in 2004, the European Central Bank (ECB) called for greater legal clarity as to the terms by which the CNB’s governor may be dismissed by the Czech president. Analysts, however, have disagreed with the ECB's concerns. Although the law does not specify a right of appeal for dismissed board members, such appeals have been lodged in the past.

The OA report states that the CNB accepts government deposits "under a special service agreement" (p. 96), and publishes data on the interest payments on such deposits every 10 days on the CNB balance sheet. The law stipulates the CNB's responsibility with regard to domestic and external public debt. The CNB Act expressly prohibits the central bank from authorizing government overdrafts, purchasing government securities, or other activities aimed at offering the government or its agencies any form of financial support. The CNB works with the MoF collaboratively with regard to debt management and euro adoption strategy, and the CNB offers recommendations regarding fiscal policy. According to the OA report, the CNB's oversight responsibilities in the banking, insurance, and capital-market sectors were created in 2006 by law. Previously, these duties were spread across three separate agencies (CNB, MoF, and the Czech Securities Commission). Reporting by the various sectors is done by means of a CNB-issued template. The CNB is still dealing with fallout from actions taken in the latter part of the 1990s aimed at stabilizing the banking sector. According to OA, this resulted in "an increase of bad assets on the CNB balance sheet" (p. 97). The CNB's profits are deployed to maintain appropriate levels in its Reserve Fund and other CNB budgeted funds, with any excess transferred to the national budget, at least in theory. Such transfers have not yet occurred, "because of persistent CNB losses, most recently due to the devaluation of its U.S. dollar reserves" (p. 97), OA notes. Finally, according to OA, "the CNB has been entrusted by the MoF to manage the primary sale of domestic government bonds and treasury bills. The sale of foreign debt is handled by the Government Debt Management Unit through private agents" (p. 97).

CPOpen process for formulating and reporting monetary policy decisions.

The 2006 OA assessment awarded a rating of "compliance in progress" (p. 98) for this principle. Since 1998, monetary policy has employed inflation targeting as its primary monetary policy tool, and since 2006 has set a medium-term, 3 percent annual target with a plus-or-minus 1 percent range of permissible variation in the event of certain circumstances. These exceptions are specified on the CNB website. The system is aimed to bring the Czech Republic into Maastricht compliance, with an eye toward ultimate accession to the euro zone. OA notes that this target may be subject to revision, however. The cooperation between the CNB, the MoF, and the Czech trade unions add credibility to the CNB's inflation-targeting efforts. Performance assessments of the inflation-targeting regime are offered to the public on the CNB website, and past successes are published in the CNB's Inflation Report. Inflation forecasting is developed by the CNB board, and the forecasting process is augmented by twice-annual seminars on the subject to which outside experts and market participants are invited. OA reported that the CNB remains firm in its commitment to join the European Monetary Union once it meets the Maastricht criteria, but "wants to limit the period of a managed exchange rate under the ERM II mechanism to the acceptable minimum of two years" (p. 98). To this end, the government originally stated its intention to join ERM II in 2007, but this goal has been pushed back since the 2006 parliamentary elections resulted in political deadlock. Since then, representatives for the Czech Republic at the IMF have noted that increased exchange rate volatility as a result of the 2008 global financial crisis has likely delayed euro adoption even further. A statement from the representatives attached to the IMF’s 2008 Article IV Consultation report notes that “the Ministry of Finance and the CNB have recommended that the government should not set a target date for adopting the euro” (p. 4).

According to the OA report, the law specifies the CNB's responsibilities for setting the terms of the transactions that fall under its legal purview (interest rates, maturities, structures, et al.). It deals with excess liquidity through open market operations, and it offers short-term (three-month) loans to banks. In addition, according to the OA report, "Fine-tuning instruments include ad hoc foreign exchange and securities operations. Automatic facilities include marginal lending and deposit facilities" (p. 99). OA also notes that the CNB largely conforms to EU standards in its use of monetary instruments, "with the exception of minor details of the reserve requirement" (p. 99).

The CNB has a seven-member board, comprising a governor, two deputies, and four others. All must be employed full-time by the bank and share collective responsibility for CNB management. According to OA, the CNB board members must be professionally qualified and experienced, and be appointed to their non-renewable, six-year terms by the Czech president. The appointments occur individually – it is not the case that the board is subject to across-the-board replacements. Majority voting is the rule. The professional biographies of board members are available on the CNB website. While there were concerns raised that the new president, Vaclav Klaus, might politicize the CNB board through his appointments, the OA report notes that these concerns have not been borne out. The board formulates basic monetary policy and determines the tools to be used for policy implementation. It is also responsible for the CNB's structure and budget. The CNB website makes board minutes publicly available. Four days after each board meeting, the CNB issues a press conference in which it discloses the voting ratio, identifying how each board member voted. More complete voting records and meeting transcripts for past board meetings (covering July through December of 2001) were set to be released in early 2008. A review of the CNB website in December of 2009 confirmed that board meeting transcripts for these dates were indeed available.

The CNB website offers advance release of its board's meeting schedule (weekly, with one meeting per month specifically addressing monetary policy). The OA report notes that, in addition, the CNB prepares an Annual Report and an annual Financial Report, both of which are available on the website. Also available annually is a Report on Banking Supervisory Activities, and there is a quarterly Inflation Report. In addition, the CNB website makes available a wide range of monetary-policy related documents, including the CNB Working Papers, the CNB Internal Research and Policy Notes, and the CNB Economic Research Bulletin, as well as many archival documents. It also publishes the quarterly Central Bank Monitoring, which is devoted to the activities of other central banks, both regional and worldwide. The website also offers public access to the CNB's macroeconomic framework and the text of legislation relating to its activities and euro accession. Further public access to CNB monetary policy activities is facilitated by the bank's issuance of press releases and director interviews, also available on the website. While the law does not require the CNB to consult with interested parties regarding regulatory changes, outside experts are consulted in practice.

FCPublic availability of information on monetary policy.

The 2006 OA awarded a rating of "full compliance" for this principle and called the CNB’s website "exemplary" (p. 102). A review of the IMF's SDDS website discloses that the CNB's posted macroeconomic statistics meet or exceed SDDS requirements. According to OA, the CNB publishes currency and banking data, as well as balance of payments data, inflation and interest rates, labor statistics, foreign trade, domestic credit and deposits, monetary aggregates, and the investment position. It also offers information on its monetary policy instruments. As of 2009, the CNB’s Inflation Reports have contained exchange-rate projections as well. The OA report notes that the CNB balance sheet is published, with asset/liability breakdowns, every ten days. The annual Financial Report contains the consolidated balance sheet, with a shorter version included in the Annual Report. Also available annually are the CNB's financial statements. The rules governing CNB activities in its role of "lender of last resort" are, according to OA, less than clear cut. The CNB website offers public access to press releases and press conferences, interviews and other pronouncements of central bank officials, and articles in the media.

The IMF's SDDS website discloses that the Czech Republic has been a member since 1998 and first posted its metadata in 1999. According to the website, Czech-posted monetary data meets or exceeds all SDDS requirements for coverage, timeliness, and periodicity, and meets the requirements regarding advance release calendars, simultaneous release, and public accessibility.

FCAccountability and assurances of integrity by the central bank.

The 2006 OA assessment awarded a rating of "full compliance" for this principle (p. 104). The CNB is accountable to Parliament's Chamber of Deputies, to which it must submit a report of developments in monetary policy at a hearing in which the governor must testify. The law also requires the CNB to produce a formal, transparent budget breakdown of its operating income and expenses. It must comply with the 1991 Accounting Act. It must submit a full financial statement each year to the Chamber of Deputies. The maximum allowable lag for this statement is three months following the end of the calendar year. The CNB's internal audit division carries out risk assessments and ad hoc audits as required, and follows up on recommendations made by external auditors. Compliance issues are addressed by the board each quarter. CNB financial statements are audited by a professional jointly selected by the CNB board and the MoF. External auditors are selected every five years by the Internal Audit Department. The CNB's operating expenditures and property acquisitions are subject to audit by the Supreme Audit Office of the Czech Republic. Official conduct is regulated by the CNB Act, which prohibits board members from outside employment and addresses other conflict-of-interest issues. The OA report notes that the Czech president "has the authority to dismiss Board members who have contravened legal provisions, whose competence to perform legal acts has been compromised, or who have failed to carry out their duties for more than six months" (pp. 104-105). The CNB also contains provisions to safeguard confidentiality. A new Ethical Code was adopted in April 2006 that extended regulations to cover the CNB's newly mandated responsibilities in the capital markets. Details on the CNB's internal governance procedures, however, have not been publicly disclosed.