Czech National Banks sees slowdown in crown appreciation

In its latest forecasts, the Czech national bank sees a slowdown in price rises and the appreciation of the Czech crown. That last factor could open the door to interest rate hikes, but analysts see just one on the horizon towards the end of this year.

Photo: Khalil BaalbakiPhoto: Khalil Baalbaki The Czech National Bank is counting on a slowdown in the strengthening of the local currency, the crown, till the end of the year and into 2019.

The latest inflation report released by the bank counts on the continuing higher interest rates in the country compared with the Eurozone still fuelling the strengthening crown. But the latest forecast sees a slowdown in that strengthening to around 24.60 crowns/ euro by the end of the year and by the end of 2019 to 24.30 crowns/euro. This represents a retreat from the bank’s previous forecast in February.

The crown, at around 25.47 crowns/euro at the moment is already in weaker territory than the bank had earlier predicted. Previous forecasts had expected the crown to be hovering around 25 crowns/euro already.

A further brake on the crown’s strengthening is also expected as a result of the European Central Bank’s gradual retreat from its current relaxed monetary policy and return to a more conventional policy based on higher and rising interest rates. This would erode the attractiveness for investors of piling into the crown based on its interest rate edge and the potential for the currency to appreciate further.

Inflation is also coming in under the bank’s previous expectations. Inflation is now seen coming under the 2.0 percent target rate, in part due to lower food prices and cheaper imported aided by the strong crown, and will only begin to approach that level later in 2019.

The evolution of the crown, or at least how the Czech central bank perceives it, is seen as a crucial signal for how Czech interest rate policy will be played.

In theory, a slower increase in the currency’s appreciation could open the door to faster and bolder rate rises. But the central bank is now apparently betting on just one further hike in interest rates at the end of this year or early in 2019.

The key Czech interest rate was kept unchanged at 0.75 percent at the bank board meeting on Thursday. Apparently, one hand was raised in favour of another increase.

The central bank sees Czech economic growth throughout 2018 and 2019 coming in at around 3.0 percent.