Yields on Czech bonds climbed to the highest levels seen since 2014 on October 25 after a policymaker drove up expectations for a Czech interest rate hike in November.   

Mojmir Hampl, vice-governor of Czechia’s central bank, the Czech National Bank (CNB), commented that it was time for rates to go up, adding that he viewed the koruna as overbought.

Reuters said that according to its data the mid-yields on Czech government paper were at their highest in three years.

The koruna edged back to 25.62 per euro by 1745 Prague time on October 25 having gained to four-year highs on the previous day after rate setter Tomas Nidetzky said that it had not firmed enough to prevent a rates tightening. He added that the CNB could even consider tripling its main rate to 0.75% when meeting on Novemer 2. Hampl on the other hand is angling for a uniform 25 basis-point hike.

It was mid-August when the koruna hit CZK25.770 to the euro and thus got back to the levels it traded at prior to the central bank’s decision to launch an intervention regime in November 2013. That regime eventuated in the koruna being capped at weaker than CZK27.0 to the euro until April this year. The removal of the cap by the CNB was followed in August by Czechia’s first interest rate increase in a decade.

Prior to the end of the CNB intervention foreign speculators bought tens of billions of euros worth of koruna, predicting a rewarding appreciation of the Czech currency.

Analysts now say the CNB will face a tricky job to roll out its rate hike cycle without weighing on expectations for more tightening and destroying a key pillar supporting the strength of the koruna.

Reuters reported Raiffeisen analysts summing up the situation in a note, reading: "Whereas we see more CZK (koruna) appreciation potential, given that the CZK still remains somewhat undervalued against the euro, the current speed of appreciation in our view increases the risks for setbacks. Such a setback could occur when rate hike speculation loses momentum, or if foreign investors see the scope for additional CZK appreciation diminishing."