It’s now a year since the Czech National Bank (ČNB) took the decisive step of quitting the so-called low crown regime and allowing the currency to float on markets.
The move market the end of a more than three year period when the crown had been kept artificially low, at 27 crowns to the euro or below, in a move aimed at boosting the economy and heading off the dread prospect of deflation.
The central bank’s move on April 6, 2017, was not though a totally clean break with the recent past. Worried that that crown might fluctuate wildly, the bank had warned that it would intervene as needed if the local currency rocketed in value or fluctuations became too wild for the local economy to easily handle.
In the end though the move looks to have been relatively smooth and accomplished without too much pain. The interventions to hold the crown in check were not eventually needed. And, all in all, the appreciation of the crown has not been as high or rapid as some might have feared.
A year on, the crown has strengthened by around 1.70 crowns to the euro, or by around eight percent. The gain against the US dollar has been much more dramatic, around 20 percent. The crown has levelled off at around 25.3 crowns/euro since the start of the year.
Many expected the crown to rise even higher and one brake on a more dramatic rise is the large flows of speculative capital that flowed into the currency before the end of the low crown ended. Some of those speculative positions have been ended but a lot of them are believed by analysts to be still in place in the expectations that the crown will continue its steady appreciation in the near future.
Without the low crown policy and speculative brake, some analysts say the currency would now be valued at around 23.60 to 23.70 crowns/euro.
The low crown policy – introduced when interest rates had been cut so low they could not go further except into the relatively untried and experimental territory of negative rates – still divides many in the Czech Republic on whether it was the right step at the right time.
The biggest trades union organisation maintains that the policy allowed exporters to enjoy exaggerated profits and that many of the gains were not re-invested but instead shipped out of the country in the form of dividend payments and profits for foreign owned companies. The central bank argues that no other viable policy was available.
Now, it’s the exporters who are faced with the appreciating crown and the tough option of whether to cut into their profit margins or risk losing competitiveness when selling outside the home market. Of course, those largely reliant on imported raw materials, likely denominated in dollars or euros, will have some gains but most will not.
Many of those exporters were given fair warning of the end of the end of the low crown and would have been able to hedge their positions. But that again is a lot easier for big companies or multinationals and more complicated for smaller firms. And Czech companies are currently facing a squeeze on another front – the pusher for higher wages from the local workforce paid in crowns. Some companies warn that it’s this double whammy that is really making their life difficult.