ČNB ends exchange rate intervention

The rate had been artificially kept at Kč 27 to the euro

The Czech National Bank (ČNB) has stopped its intervention against the Czech crown, which was keeping it near Kč 27 to the euro. By 3 pm on April 6 the crown had fallen to Kč 26.5 to the euro. The bank had previously announced that the intervention policy would end before the second quarter of 2017.

Lines could be seen at exchange offices downtown after the announcement to stop the intervention, but the stock exchange was not heavily affected by the news. The central bank did not rule out a new intervention if the exchange fluctuations become excessive.

“At its extraordinary monetary policy meeting today, the ČNB Bank Board decided to end the ČNB’s exchange rate commitment,” the bank said in a statement on its website. “On the basis of a thorough assessment of the available macroeconomic data, analyses and forecasting scenarios, the Bank Board stated that the conditions for sustainable fulfillment of the 2 percent inflation target in the future had been met. In this situation, continuation of the exchange rate commitment is no longer necessary from the perspective of fulfillment of the ČNB’s primary objective of price stability,” the statement continued.

The ČNB added that the domestic economy has been fostering rising costs and rising prices for some time. “With anti-inflationary effects from abroad simultaneously unwinding, this means that there is no longer a need to maintain expansionary monetary conditions to the current extent. The exit from the exchange rate commitment is the first step toward a gradual moderation of the expansionary nature of the monetary conditions,” the ČNB said.

According to the central bank, the discontinuation of the exchange rate commitment means that the Czech crown exchange rate will now move according to supply and demand on the foreign exchange market. “As a result, it may fluctuate in either direction in the short term. The evolution of the [crown] exchange rate is therefore still a significant uncertainty of the current forecast. The ČNB stands ready to use its instruments to mitigate potential excessive exchange rate fluctuations if needed,” the bank concluded.

The central bank decided to use the exchange rate as a monetary policy instrument on Nov. 7, 2013. At that time, the bank pledged to intervene where necessary in the foreign exchange market to weaken the crown “so as to maintain the exchange rate close to Kč 27 to the euro.”

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