Czech Republic: Reserve Requirements, 1997

In the first quarter of 1997, fiscal and current account deficits in the Czech Republic put pressure on the koruna's pegged exchange rate as capital flowed out of the domestic economy. Although the Czech National Bank (CNB) committed to tight monetary policy to protect the peg, on April 11, the CNB announced a lowering of the minimum reserve requirement (RR) ratio from 11.5% to 9.5%, effective May 8. The RR ratio (RRR) reduction (RRR) reflected a compromise with the government, which had petitioned the central bank to ease monetary policy. To improve the balance of payments, the government also implemented budget cuts along with several other economic correction measures. Most novel among these measures was a scheme that required importers to deposit funds temporarily with the central bank, which helped sterilize the liquidity produced by the RRR reduction. Nevertheless, the koruna continued to face intense speculative attacks. On May 26, the CNB abandoned the peg and switched to a managed float. The CNB said that the May 1997 RRR reduction released CZK 20 billion (USD 660 million) of liquidity into the system during the crisis, although about half of that was offset by the import deposit scheme.