Prague, Czech Republic – August 9, 2023

The Czech National Bank’s (CNB) recent announcement of discontinuing its intervention support for the koruna has led to significant currency depreciation. The koruna’s exchange rate against the euro has stabilized around CZK 24.2 per euro for the last two days, but experts suggest that further depreciation is likely in the coming weeks.

Miroslav Novák, an analyst at Akcenta, highlighted that the Czech currency has been experiencing a gradual depreciation since May. While this depreciation has largely gone unnoticed due to its gradual nature, the koruna has declined by around three percent from May to July. Novák anticipates that this depreciation trend will persist in the coming weeks, primarily driven by the formal end of the intervention support regime.

Although the CNB had not actively intervened to support the koruna since October of the previous year, the mere possibility of intervention played a role in maintaining the koruna’s stability. The intervention regime acted as a psychological buffer, providing an illusion of protection even though the central bank was not intervening in practice. Moreover, the CNB’s emphasis on a strong koruna over the past year also contributed to this perception. However, the August CNB meeting signaled a shift in this approach, as the importance of a strong exchange rate for the koruna has diminished due to falling inflation rates.

During the CNB’s previous intervention support between May and October last year, the exchange rate hovered around CZK 24.7 per euro. Novák suggests that the koruna might return to this range in the coming weeks.

In its statement last Thursday, the CNB not only officially ended interventions but also asserted its commitment to prevent excessive exchange rate fluctuations that could jeopardize price or financial stability within the managed floating rate regime. Novák emphasizes that if the koruna experiences significant and rapid depreciation (reaching around CZK 25 per euro), the CNB could potentially intervene due to its substantial foreign exchange reserves, which remain at a high level.

As the Czech koruna navigates these shifts, analysts and market participants are closely monitoring its trajectory and potential impacts on the broader economic landscape.

Article by Prague Forum