As of 6 April, the Czech koruna or crown is no longer the “world’s most boring currency” (as it was previously called by the Financial Times) – the exchange rate commitment of the Czech National Bank (CNB) was ended after more than three years. This means that the Czech koruna will now move freely according to supply and demand on the foreign exchange market. However, interest rates (two-week repo rate and discount rate) remain unchanged at 0.05%.
The Czech National Bank has been taking various different measures since 2012 in order to meet the 2% inflation target necessary for price stability which was the CNB’s objective. As the Czech Republic was facing an economic downturn (increase in unemployment, decrease in household incomes and consumption, and decrease in profits), the CNB lowered the interest rates to 0.05% (effective since November 2012), which is technically zero, in order to help boost the Czech economy.
On 7 November 2013, the CNB’s board imposed a Swiss-style lower limit on the euro-koruna exchange rate. This means that the CNB was to intervene in the foreign exchange market if necessary in order to maintain the “weak” Czech koruna, that is the exchange rate of around 27 CZK/1 EUR. This monetary policy instrument was adopted in order to prevent deflation in situations where the interest rates were already at a technical zero. The weaker exchange rate was intended to lead to an increase in import prices and support local economic activities.
The CNB was therefore printing Czech currency and selling it on the foreign exchange markets in order to reach the set exchange rate and meet the target of 2% inflation. This led to foreign exchange reserves being increased up to approximately CZK 3 trillion (an increase of approximately 2 trillion Czech korunas compared to the situation prior to the interventions).
The pressure by investors and the costs of the intervention were much higher towards the end of the intervention, as it was announced that the CNB may end the exchange rate commitment in second quarter of 2017. In February 2017, the CNB undertook intervention measures involving approximately CZK 220 billion (compared to approximately CZK 16.8 billion in February 2016).
At an extraordinary monetary policy meeting of the CNB’s board on 6 April 2017 it was decided to end the exchange rate commitment and the board stated that conditions for sustainable fulfillment of the 2% inflation target in the future had been met. While no statement was made regarding interest rates, it is speculated that an increase in interest rates will take place in 2017. The reaction of the exchange rates was not drastic, with the Czech koruna immediately rallying up to 26.26 CZK/1 EUR. However after two weeks it reached the same exchange rate as during the intervention. Therefore further economic consequences are still to be determined.