The Czech National Bank has officially ended its intervention regime to support the koruna, which has been in place since May 2022. During the first year of its implementation, the central bank intervened in the amount of 26 billion euros. However, since January of last year, there has been no active intervention in the foreign exchange market. The market seemed to be satisfied with the verbal commitment alone, which kept the koruna well below the intervention level of 24.70 koruna per euro.
The termination of the intervention regime is a formal matter for central banks and signifies a return to normalcy. This means that the central bank will now operate under a floating exchange rate regime, which allows for intervention in case of unexpected exchange rate fluctuations. The decision of the central bank played a significant role in ensuring that foreign investors no longer had guaranteed returns in the Czech Republic. As a result, the Czech currency ceased to function as a safe haven for foreign speculators to securely invest their capital and benefit from its positive interest rate differential.
The current exchange rate of the koruna is critical for Czech exporters, according to businesspeople. They are concerned about its future development. The decision of the central bank’s board can be interpreted as preparation for the first interest rate cut. By no longer considering a strong koruna as an important tool in the fight against inflation, the central bank is expressing its confidence in the relatively soon restoration of price stability. In this sense, it marks the beginning of a cycle of monetary policy easing. The weaker koruna has erased the previous tightening of monetary conditions, which helped to dampen imported inflation through cheaper imports.
What does this mean for the koruna? It is likely that it will seek a new post-intervention level for some time, which may lead to greater volatility. However, overall, the koruna does not have many trump cards that could significantly and sustainably push it below 24 koruna per euro. Given the narrowing interest rate differential, we can expect a gradual weakening of the currency. Without the guarantee of the central bank, the koruna will also be much more vulnerable to global and regional mood swings.
How did the market react to the central bank’s verbal assurance in maintaining the koruna’s value below the intervention threshold, and what implications does this have for future intervention strategies
The Czech National Bank has officially terminated its intervention program aimed at bolstering the koruna, which had been in effect since May 2022. In the initial phase of the program, the central bank intervened by approximately 26 billion euros. However, beginning in January of the following year, no active intervention occurred in the foreign exchange market. Surprisingly, the market appeared content with the verbal assurance provided by the central bank, which effectively maintained the koruna’s value significantly below the intervention threshold of 24.70 k.
Finally! It’s about time the Czech currency returns to normal. Hopefully, this will bring stability to the economy.
Ryan: This is great news for the Czech Republic. It’s a sign of a strong and stable economy.
Sophie: I hope the end of intervention leads to a more favorable exchange rate for travelers visiting the Czech Republic.
I agree, Annie. It will be interesting to see how the end of the intervention impacts the exchange rate and the overall economy of the Czech Republic.