The Czech National Bank (CNB) announced it is ending intervening in favour of the domestic currency koruna (CZK), sending it on the steepest drop in one year. At its meeting, the CNB board also decided to keep the interest rates at 7%.

The CNB has been actively intervening, using its large foreign exchange reserves, to strengthen the koruna since last spring, when the domestic currency fluctuated following the Russian invasion of Ukraine.   

“Ending of the intervention regime is a purely formal step as part of transparent monetary policy, do not see today’s decision as a change. Strong koruna is [seen as] important for the whole [CNB] board,” CNB governor Ales Michl said at a press conference, keeping up his argument that the koruna is “a very important tool for low inflation”. 

Following the announcement, by 5pm CET on August 3, the koruna weakened by CZK0.22 to CZK24.19 to the euro and by CZK0.18 to CZK22.12 to the US dollar.

An analyst from XTB market consulting firm, Stepan Hajek, told Czech Television that Thursday’s weakening of the koruna was the steepest one since summer last year when the CZK weakened in response to the appointment of Michl as the CNB’s governor by the then president, populist Milos Zeman. 

ING highlighted that the decision to end the intervention regime is technical and “does not change anything, as the Czech koruna is a managed float regime, so the central bank can intervene at any time,” something Michl also pointed out during his press statement.

The CNB has been criticised for its FX interventions, and by the year’s end, it made a record loss of CZK411.8bn (€17.2bn). Analysts estimated that from May to November 10, 2022, CNB interventions amounted to €28bn, which is 17.4% of the CNB’s foreign currency reserves.

“It seems that the board wanted to test the market before the actual rate cut and also perhaps work off some monetary easing before the actual rate cut,” ING inferred, forecasting the first rate cut to come in November.

The CNB also presented a new outlook projecting the inflation for 2023 to be 11% and fall to 2.1% in 2024. It worsened the GDP projection to a mild growth of 0.1% year-on-year and to recover from stagnation only next year with 2% y/y growth.  

“Domestic demand will rebound in the second half of this year on the back of renewed real growth in the income of households and the investment activity of firms,” the CNB stated.