During its monetary meeting on Thursday, the Czech National Bank (CNB) announced its decision to maintain its base interest rate at 7%, unchanged since June last year. The CNB also formally announced the termination of its intervention regime to support the currency exchange rate.

The discount rate and Lombard rate were also kept steady at 6% and 8%, respectively. The Lombard rate allows commercial banks to borrow money from the central bank against pledged securities, while the discount rate is linked to penalties for unpaid loans.

According to the CNB’s press release, it has refrained from intervening in the foreign exchange market to counteract the weakening of the crown since October 2022. The bank’s board has officially ended the intervention regime, which was implemented in May 2022, and has resumed selling part of the profits from foreign exchange reserves. Nonetheless, the CNB remains committed to defending excessive fluctuations in the crown’s exchange rate that could jeopardize price or financial stability, within the framework of the floating exchange rate regime.

While the decision to maintain interest rates was expected, analysts’ opinions vary regarding the CNB’s future actions. Some anticipate a potential rate reduction at the beginning of 2024, while Ebury analysts foresee the first rate cut as early as the last quarter of this year.

CNB Governor Ales Michl presented the summer macroeconomic forecast at a press conference later in the afternoon. The outcome of the press conference could offer insights into the central bank’s plans for interest rate adjustments.

The CNB’s decision to end the intervention regime indicates confidence in the Czech economy’s resilience to market forces, allowing the crown’s exchange rate to be determined by supply and demand. This move reflects the bank’s trust in the country’s economic fundamentals and its ability to withstand fluctuations in the currency exchange rate.

For investors, the decision to maintain interest rates provides a sense of market stability. However, the uncertainty surrounding future interest rate movements necessitates a cautious approach. Investors should closely monitor any developments that may influence the central bank’s decision-making in the coming months.

Additionally, investors should keep a close eye on the crown’s exchange rate, as the cessation of the intervention regime may lead to fluctuations. Nevertheless, the CNB’s commitment to preventing excessive volatility in the exchange rate should offer some reassurance and contribute to overall stability in the currency market.

Article by Prague Forum