Koruna Gains as Inflation Damps Intervention Case: Prague Mover

The Czech koruna appreciated to the highest level in almost three weeks as quickening inflation damped the case for the central bank to sell the currency.

The koruna gained as much as 0.9 percent to its strongest since June 20, and traded 0.4 percent up to 25.883 by 4:59 p.m. in Prague. It was 5.2 percent weaker than on Sept. 17, a day before the central bank first signaled readiness to intervene in the currency market to avoid undershooting its 1 percent to 3 percent inflation target band.

Consumer prices increased 1.6 percent in June from a year earlier, the statistics office in Prague said. That exceeded the median estimate in a Bloomberg survey of analysts for inflation unchanged from previous month at a three-year low of 1.3 percent and the Czech National Bank’s 1.4 percent forecast.

“The likely elevated inflation rate significantly reduces the probability of koruna sales,” said Nicolaie Alexandru-Chidesciuc, a London-based analyst at JPMorgan Chase & Co., in a report to clients today. “Deflation risks are low and real economic activity is showing signs of recovery.”

Data last week showed Czech retail sales unexpectedly rose in May as the economy was recovering from its longest recession on record. Gross domestic product contracted for six quarters through March, prompting the CNB to cut its main interest rate three times last year to 0.05 percent and debate koruna sales.

The rate-setting board remains split on the need to step into the market, minutes from the June 27 meeting published yesterday show. Several members called for an immediate intervention while others said “a necessary condition for commencing interventions was a risk of sustained deflation, which was not materialising,” according to the minutes.

“The faster June inflation has somewhat cooled investor expectations of CNB interventions,” Marek Drimal, an economist at Komercni Banka AS in Prague, wrote in a report to clients.

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