Koruna at Six-Week High as Intervention Bet Eases: Prague Mover

The Czech koruna strengthened to a six-week high after central bank Deputy Governor Vladimir Tomsik signaled an intervention to weaken the currency isn’t imminent.

The koruna gained 0.3 percent to 25.636 per euro as of 5:49 p.m. in Prague, the strongest intraday level since March 20. The currency has lost 4.3% since Sept. 17, the day before the central bank first signaled readiness to weaken the currency in a market intervention to help stem the nation’s recession.

Policy makers today kept the benchmark interest rate at 0.05 percent and cut their forecasts for gross domestic product this year and next. The currency’s weakness has been offsetting anti-inflationary pressures, making intervention unnecessary, Tomsik said today, adding that koruna sales remain the bank’s next tool if additional monetary-policy easing is needed.

“We think the Czech National Bank will step directly into the foreign-exchange market only if there is a threat of deflation,” Jiri Skop, an economist at Komercni Banka AS, wrote in a report after Tomsik’s comments. “We see a low inflationary environment in coming years, but no threat of deflation.”

Czech policy makers are in uncharted territory as they debate whether the first koruna sales in a decade are needed to meet their inflation target as the economy has shrunk for five quarters, the longest contraction since at least 1996. A weaker exchange rate boosts exports that account for about 80 percent of GDP, increases import prices and limits deflation risks.

“Since the weakening of the exchange rate has so far, to a large extent, been compensating the anti-inflationary effects of the local economy, there hasn’t been a need at this moment to take the path that we had agreed on,” Tomsik said. “On behalf of this bank, I cannot say at the moment when or whether any such steps will be needed.”

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