BUDAPEST/PRAGUE: The Czech crown retreated from a 4-year high on Thursday on surpise that the central bank’s board had agreed unanimously to a modest 25 basis point rate hike and an outlook which pointed to fewer than expected rate hikes ahead.
Although the crown extended gains from a 4-year high against the euro after the CNB decision to raise its key two-week deposit rate to 0.5 percent, it fell sharply after the CNB said its seven-member board made the decision unanimously.
Some investors had expected a bigger, 50 bp hike or at least dissent on the size, because some central bankers have talked about a bigger step.
At 1425 GMT the crown traded at 25.69 against the euro, weaker by half a percent from Wednesday.
CNB Governor Jiri Rusnok said after the meeting that he saw no obstacle to further rate hikes at any upcoming meeting.
He also said that the bank’s updated forecasts expected further firming of the crown, and he added that the current exchange rate was close to earlier assumptions.
Crown volatility increased because the monetary policy outlook was not as hawkish as some might have expected, Generali Investments CEE chief economist Radomir Jac said.
He said the currency could firm past 25.5 in a sustainable way only early next year, even though the sound Czech economy and the prospect of rate hikes supported its story.
“But the CNB indicates that it will maintain a cautious approach to interest rate hikes, as it is aware of the rising gap between monetary policy interest rates in the Czech Republic and in the euro zone,” he added.
While expectations for rate hikes have been a key factor strengthening the crown, it has also been supported by economic data showing healthy growth in economic output, similar to other economies in Central Europe.
The Czech economy is seen remaining robust even though the election winner ANO may need to form a minority government after being shunned by other parties.
While the CNB needs to fight inflation, which is above its 2 percent target, the key risk to the crown is how the central bank manages interest rate hike expectations, analysts have said.
Elsewhere in Central Europe, the forint and the zloty changed little, more or less tracking the euro/dollar cross.
Equities were mixed. Budapest’s main index hit a new record high, boosted by an over 2 percent rise in the shares of oil group MOL which analysts expect to report good third-quarter earnings on Friday.
Source: Brecorder.com
