2/9/2024 Updated 2 hours ago|Source: ČT24, ČTK
Events: The crown weakened (source: ČT24)
The Czech National Bank’s (ČNB) interest rate cut on Thursday immediately reacted to the exchange rate of the koruna, which weakened by 24 pennies to 25.21 crowns per euro. The Czech currency was thus the weakest since May 2022. Against the dollar, it lost 23 pennies to 23.44 crowns per dollar. On Friday, however, it strengthened again, to the euro by three pennies and to the dollar by nine pennies. It is the policy of the central bank that is one of the key factors that influence the exchange rate, but other influences also affect it. For example, what is happening in foreign markets, when investors get rid of investments in riskier countries. Analysts expected a rate cut, but now they are talking about the fact that the market probably did not expect such a drastic change. January inflation, which the central bank is to announce next Thursday, will also be important.
According to analysts, the Czech currency slightly corrected Thursday’s losses on Friday. “The koruna ends the week weaker by about one percent, slightly below 25.20 koruna per euro. After the CNB meeting on Thursday, which sounded dovish, it briefly rose to 25.25 crowns per euro. But part of the losses were erased at the end of the week,” pointed out Jaromír Gec from Komerční banka. According to him, the further development of the koruna will also be important from the point of view of the CNB.
Development of the koruna exchange rate over the last week
“At the current meeting with analysts, councilor Jan Kubíček stated that if the koruna did not resume its strengthening this year, it could be a signal for some members of the bank board for a more cautious approach to further easing of monetary policy,” he explained.
On Thursday, the Banking Council of the Czech National Bank reduced the base interest rate by half a percentage point to 6.25 percent. The CNB thus accelerated the easing of monetary policy, which it started in December by cutting rates by a quarter of a percentage point. The current rate is at its lowest level since last June. After the announcement, the koruna weakened sharply.
Many economists say that the half percentage point cut was drastic. “The exchange rate of the koruna has clearly weakened since yesterday’s (Thursday) decision, which indicates that the market expected a smaller rate cut from the CNB. The koruna interest rate, i.e. a measure of the koruna’s attractiveness, fell more than expected – the market expected a drop of a quarter of a percentage point, while the CNB reduced it by half a percentage point,” notes Česká spořitelna economist Michal Skořepa.
Six out of seven members of the bank board were in favor of a reduction of half a percentage point, while one was even in favor of a sharper drop in rates by three quarters of a percentage point. According to Skořepá, this means that none of the bank board members were worried about January or that price developments could bring significant surprises. “The previous rhetoric, which was very cautious, seems to have evaporated quickly,” he reflects, adding that a change of mood was now evident in the banking board. “It can be seen that it has fully opened the door for further reductions that await us during this year,” he estimates.
Concerns about inflation
However, interest rate cuts are not the only reason for the weakening of the koruna, as its exchange rate already reached 25 crowns per euro last week. “One of the primary reasons is the fear of inflation, which is fading. (…) January inflation is the most important and it is quite likely that the average inflation this year will be in the range of 2.5 to three percent. And that is already lower than in the field of the eurozone or neighboring countries, (…) then it does not make sense that the rates would be at such a high level. This outlook thus pushes against the koruna and will probably cause further weakening during the year,” adds Purple Trading analyst Petr Lajsek.
Studio ČT24: Economists Michal Skořepa and Petr Lajsek comment on the weakening of the koruna (source: ČT24)
According to him, due to the expected aggressive reduction of interest rates, the Czech crown may continue to weaken this year. In such a case, however, the CNB can already intervene in favor of the domestic currency by means of foreign exchange reserves. “A too weak koruna could stir up inflation again,” he said.
However, foreign factors also influence the exchange rate of the koruna. “For example, if a Czech merchant imports goods, he must pay in euros. So they have to buy these euros, or sell korunas, so the koruna weakens. However, big shocks do not come from this sphere to the exchange rate, because the flows of payments for exports and imports change only slowly,” adds Skořepa, adding that both factors are closely linked, as the development of the economy also affects interest rates.
Development of the Czech currency exchange rate over the last six months
“In recent months, there have been rather unfavorable reports regarding the state of the Czech economy. Expectations of a faster decline in Czech interest rates flowed from those, and the result was a weakening of the koruna,” he says.
In the coming months, the CNB is expected to continue lowering interest rates. “This reduction is already largely included in the exchange rate of the koruna. If interest rates start to fall in the Eurozone and the US, which is also expected – from spring or early summer – although this is not at all certain yet, then this could help the koruna, and its value could rise slightly,” he concludes. Shell.
According to Gece, how the central bank will proceed is important for the future course of the koruna. “However, perhaps more important will be whether its future actions will coincide with current market expectations. Currently, market contracts value a drop in the two-week repo rate at around three percent by the end of this year. From our point of view, this is too ambitious, when we expect the CNB’s key rate to be reduced to “only” four percent this year,” estimates Gec.
Development of the koruna exchange rate over the past five years
According to him, the current excessive aggressiveness of market expectations could result in a certain correction of the sharp weakening of the koruna against the euro. “Even so, according to our forecast, the koruna in pair with the euro should be around 25 crowns for one euro in the first half of the year. We expect a renewal of the strengthening trend only in the second half of this year, in connection with the recovery of the domestic economy and foreign demand, and in general, improved sentiment towards the currencies of emerging markets, among which the koruna belongs,” states the analyst.
People are now cautious in their spending and buy cheaper products. They would have to make them more expensive when the koruna lost more than five percent against the euro. “The weakening of the koruna could lead to an increase in food prices, but above all to an increase in fuel prices, which is currently supported by the rising price of oil,” notes XTB analyst Tomáš Cverna.
The koruna could even be weaker than in May two years ago. “I think that if we got beyond the level of 25 crowns and 50 pennies per euro, the Czech Banking Council could step in and intervene in favor of the crown,” adds Cverna.
The Czech National Bank estimates the average exchange rate of the koruna for the whole of this year at the level of 24 crowns and 60 pennies. Next year, a thirty-penny increase awaits.
2024-02-09 19:07:30
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