Czech National Bank Ends Intervention Support for Koruna, Prompting Sharp Currency Depreciation

Last week, the Czech National Bank’s (CNB) formal announcement to end its intervention support of the koruna resulted in sharp currency depreciation. The koruna’s exchange rate against the euro has hovered around CZK 24.2 per euro for the last two days, but that rate is not expected to stabilize. According to Miroslav Novák, an analyst at Akcenta, there will be room for further depreciation in the coming weeks.

Novák pointed out that the Czech currency had been continuously depreciating since May. “However, this depreciation was not significant, and so it escaped greater attention, although overall, the koruna depreciated by about three percent from May to July,” Novák told Novinky. He added that the depreciation would continue in the coming weeks, mainly due to the formal end of the intervention support regime.

Although the CNB has not intervened to support the Koruna since last October, the fact that it could interfere helped the Koruna. The intervention regime provided imaginary protection for the koruna, even though the central bank did not intervene in reality. Additionally, the CNB emphasized the need for a strong Koruna over the last year. However, the August CNB meeting brought a change in this regard, and according to Novák, a strong exchange rate for the koruna is no longer extremely important for the CNB, considering the falling inflation rate.

When the central bank last intervened to support the koruna between May and October last year, the exchange rate was around CZK 24.7 per euro. According to Novák, the Koruna could look into this range in the coming weeks.

However, in its Thursday statement, the CNB, apart from officially ending the interventions, stated that it would “always, as a matter of principle, prevent excessive exchange rate fluctuations of the koruna that would endanger price or financial stability within the managed floating rate regime.”

Novák added, “This is why I believe that if the koruna were to begin to depreciate significantly and rapidly (by several percent and at a level of CZK 25 per euro), the CNB would intervene. Its foreign exchange reserves are still enormously high.”