The Czech koruna slid from an almost three-month high as slower-than-estimated inflation fueled speculation the central bank will act to weaken the currency.
The koruna depreciated as much as 0.7 percent, the most in two months, before trading 0.6 percent lower at 25.729 per euro by 4:21 p.m. in Prague, reversing an earlier 0.4 percent gain to the strongest level since March 18. The exchange rate was 4.6 percent weaker than the level on Sept. 17, a day before the Czech National Bank first signaled readiness to sell the koruna.
Consumer prices grew at the slowest pace in almost three years in May, the statistics office in Prague said today. The CNB, which cut its main interest rate to 0.05 percent last year, is debating whether more stimulus is needed to prevent the risk of deflation amid the country’s longest recession on record.
“Economic trends are putting more pressure on the CNB to loosen monetary policy,” Daniel Hewitt and Koon Chow, analysts at Barclays Plc in London, wrote in a report today after the Czech inflation data was published. “We are probably at a juncture where we will see verbal intervention being used again and, if it fails, maybe actual foreign-exchange intervention.”
Inflation eased to 1.3 percent in May from 1.7 percent a month earlier, the statistics office said. That’s less than the 1.6 percent median estimate of 17 economists in a Bloomberg survey, the same as the central bank’s forecast for the month.
The data poses an “anti-inflationary risk” to the central bank’s forecast, the CNB said in a statement today. The $217 billion Czech economy has contracted for six consecutive quarters through March.
“Central bankers will probably keep intervening verbally to remind the markets that the CNB wants to keep the koruna at weaker levels,” Jiri Skop, a Komercni Banka AS economist in Prague, wrote in a note today. “Direct foreign-exchange market interventions can only be expected if deflation risk occurs.”
Czech government bonds fell today, lifting the yield on five-year notes by 13 basis points, or 0.13 percentage point, to a 10-month high of 1.43 percent. That increased the extra yield investors demand to hold the debt rather than German bunds of the same maturity to 83 basis points, the most in nine months, generic indexes compiled by Bloomberg show.