Weak crown ends with strong Czech currency seen on the horizon

The Czech crown is no longer subject to the central bank’s low crown regime, or specifically the currency interventions that kept it at or below 27 crowns to the euro. But that does not mean a complete ‘hands off’ from the central bank. So if it’s not deliberately low, where will the crown now go?

Jiří Rusnok, photo: CTKJiří Rusnok, photo: CTK After failing to deliver the death sentence to the low crown a week ago, bank governor Jiří Rusnok only provided a short stay of execution and on Thursday he announced that after more than 40 months the currency interventions that underpinned the low crown regime were over with immediate effect.

But that does not mean that the national bank will just be sitting on the sidelines watching how the crown now floats on the currency markets. Rusnok explained that currency intervention and interest rates will both be tool’s if the crown climbs too high or falls too low. But the bank is at first playing a waiting game to see where the crown levels out now that the mooring ties have, so to speak, been released.

"We will have to see. Let’s not be too hasty to come to conclusions. It’s necessary to be patient and not to be influenced by what happens in the first hours and days after the release from the [low crown] commitment. It’s a bit like when a patient wakes up from anaesthetic and is not at his best for some time afterwards. It does not mean that operation was not a success. At the moment we are calm, the patient appears fine and we hope that will continueʺ

Rusnok pointed out that the before the 27 crown peg, the crown had fluctuated as widely as between 23 and 30 crowns to the euro, a fairly broad spread. In the immediate aftermath, the crown rose against the euro by around 40 halers, or around 1.5 percent and that’s where it was parked around 24 hours after the end of intervention announcement on Friday.

Deloitte chief economist David Marek says the crown could get a lot stronger, rising nominally by around 10 percent to around 24 crowns to the euro. And while currency intervention and changes in interest rates are both now theoretical tools for the central bank, rate changes are not likely to be used any time soon.

David Marek, photo: Šárka ŠevčíkováDavid Marek, photo: Šárka Ševčíková ʺI would not expect any changes in interest rates this year because if the Czech National Bank would increase its interest rates, then the pace of appreciation would be too quick."

In theory the winners from a stronger crown should be importers, those using foreign currency on holidays, and car drivers who might see petrol prices, determined by the strength of the US dollar, come down. But because taxes take up such a huge chunk of petrol prices, the rejoicing and savings are not likely to be that great and the other benefits could take a while to come through. David Marek again:

"The impact on the total petrol price is quite limited. And for other goods the delay can be quite some time, it can be several months.ʺ