The central banks in Central Europe evidently continue to be troubled by the fact that the actual inflation is below their inflation targets. After Tuesday’s cut in the base rate by the National Bank of Hungary to an all-time low, the Czech National Bank also came out with a strongly dovish signal. Through a press conference by Governor Singer, it warned that the risks to its macroeconomic forecast were tilted on the downside and that the probability of launching interventions (against the ‘strong’ koruna) was consequently increasing. Singer indicated that there was not yet a majority of votes on the CNB Board in favour of an intervention against the koruna. This may change over the course of time, depending on the development of external factors and, in particular, of domestic eco data.
We interpret Singer’s comments approximately as follows: if the koruna again strengthened significantly towards the levels around which it hovered in the middle of June, the launch of actual interventions in order to boost the economy would be very likely this time. Bear in mind that the EUR/CZK pair even temporarily fell below the 25.50 level before the release of May’s surprisingly low inflation. Afterwards, however, the koruna began weakening and therefore did not provoke the CNB Board enough to intervene. In this regard, let us add that the question of CNB forex interventions will become clearer with a new forecast (with an implicit prediction of the EUR/CZK exchange rate), which will be available to the CNB Board at its next meeting in early August.
The reaction of the koruna was understandable from this point of view and, after more than a month, the EUR/CZK currency pair returned to more than the 26.0 level, while the trading volumes were quite high. Thus the koruna, in the wake of the Governor’s comments, even lagged behind the rest of the region, as the exchange rates of the zloty and the forint were only little changed.