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The Czech currency is weakening despite the interest rate increase by the central bank. Economics – News Article articles



Prague, November 18 (TASR) – Economists predicted this year's strengthening of the Czech crown below the threshold of CZK 25 / EUR. Currently, however, the exchange rate is close to 26 CZK / EUR. The central bank's policy, which raised interest rates five times a year, did not help the Czech currency. The main reason for this is fear of global imbalance and trade war. Exporting countries like the Czech Republic felt very intense.

It turns out that the scenarios, according to which the Czech currency has significantly strengthened since last year's end of the obligation to implement the exchange rate of the National Bank of the Czech Republic (CNB), have not been met.

In the January issue of the economic weekly, leading economists and analysts of today's situation did not actually present the actual development of almost anyone. Forecasts were around the threshold of CZK 25 / EUR. And some were even more daring, even starting at 24.

Several factors should have a positive impact on the Czech currency – a faster rise in interest rates in the Czech Republic than in the euro area, a marked increase in the economy compared to other European countries or the fact that the crown was significantly undervalued after over three years of CNB interventions.

Although all these factors are more or less met, the crown is now weaker than in January. Earlier this year, the euro could be purchased for around USD 25.50. One of the main trombones of the Czech currency was the CNB policy.

The central bank started raising interest rates in 2017, and the tightening of monetary policy was continued in 2018. The key repo rate increased this year five times from 0.5% to 1.75%. On the other hand, the European Central Bank (ECB) still maintains zero rates. As a result, crown investments are now more profitable than those in euro, which should increase demand for the crown. But it's not like that.

The reason why the crown does not respond to interest rate hikes in line with economic theory is, according to analysts, difficult to predict, but very important events abroad.

"The crown is simply not affected by domestic factors, and even 80% of the exchange rate of the crown is caused by foreign factors, but only 20% remains for the CNB," explains Franndisek Taborsky, a macroeconomic analyst at Raiffeisenbank. Foreign events may be marked differently this year, but not without significance.

The biggest obstacle to strengthening crown economists is the policy of the American central bank (Fed). "The growing Fed rates are increasing the attractiveness of investment in a safe bottom port, and investors are moving massively from the world back to the United States," said the chief economist of the Czech savings bank, David Navratil.

The outflow of capital was felt primarily by emerging markets, on which many investors are counting on the Czech Republic. "Investors began to look at the crown as a menu that is part of the Central European currency basket, so our currency began to behave like a zloty gold or Hungarian forint against the euro and the dollar." In the last two neighboring currencies this year weakened more than the Czech crown, added the chief economist Komerční banka Jan Vejmělek.


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