Vladimir Weiss/Bloomberg News.

Emerging World's Safe Haven From Fed Puts Czech Policy on Edge

The Czech Republic's trend-busting currency is causing headaches for the central bank

Not even the prospect of higher U.S. interest rates is helping the Czech central bank’s drive to rein in the nation’s currency. 

As investors exit riskier assets on speculation the Federal Reserve will this week raise rates for the first time since 2006, they’re turning to the haven of the Czech Republic, one of the European Union’s fastest-growing economies.

That’s made the koruna the best-performing emerging-market currency since the Fed’s last meeting in October, putting further downward pressure on a Czech inflation rate that is already near zero. The central bank is set to maintain its cap on the currency, at 27 to the euro, at its policy meeting on Wednesday. 

 

With the benchmark interest rate at 0.05 percent, the Czech National Bank intervened to weaken its currency and imposed a limit on the koruna’s gains two years ago to fend off the threat of deflation. It was forced to resume koruna sales in July as the nation became a destination for liquidity spurred by the European Central Bank’s quantitative-easing program. 

Even with those efforts to prevent the koruna from strengthening, tumbling commodity prices helped push the annual inflation rate to a nine-month low of 0.1 percent in November. 

“We expect solid economic performance in the Czech Republic to continue, supported by robust domestic demand, which should, in turn, intensify pressure” on the koruna cap, Royal Bank of Scotland Group Plc analysts Anna Tokar and Gabor Ambrus said in a note last week.  Pressure on the koruna will probably continue, mainly as a result of the extension of the ECB’s bond-buying program and the “consistently strong economic activity data” in the Czech Republic, they said. 


Capital is flowing into Czech assets even as the Finance Ministry sells bonds at negative yields. In contrast, regional peers like Poland’s zloty and the Hungarian forint have weakened. 

Except for the Czech koruna and Brazil’s real, all emerging-market currencies tracked by Bloomberg have lost value against the euro since the last Fed meeting on Oct. 28. Policy makers last month said that slower price growth means their intervention policy, which limits the koruna from gaining beyond about 27 per euro, would probably be extended until around end-2016. 

“Only the Czech koruna, as if none of this mattered, is calmly sailing in the close proximity of 27 against the euro,” CSOB AS analysts including Jan Bures in Prague said in a note. 

Before it's here, it's on the Bloomberg Terminal. LEARN MORE