Czech koruna jumps after central bank unpegs currency from the euro

 
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Inflation has returned to the Czech Republic (Source: Getty)

The Czech koruna jumped today against major currencies as the country’s central bank abandoned its policy of pegging its value to the euro.

The decision, taken today, was announced with immediate effect, sending the koruna, or crown, up by 1.55 per cent against the euro at the time of writing. One euro hit lows of 26.6 koruna in mid-afternoon trading, down from the pegged level of 27 koruna to the euro.

The Czech National Bank (CNB) said it stood ready to step in if the currency’s swing was dramatic. However, the fall in value was relatively orderly, with lower volatility than comparable moves such as Switzerland's central bank in 2015.

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The central bank said the peg was no longer necessary “from the perspective of fulfilment of the CNB’s primary objective of price stability”. It had first introduced the peg in 2013.

Inflation in the Czech Republic rose to a 2.5 per cent annual rate in February. The pace of price rises has increased since the end of last year after a protracted period of low inflation, even verging on deflation at points.

By intervening in markets to peg the koruna to the euro the CNB aimed to ensure a strengthening currency did not feed through to lower import prices from the neighbouring Eurozone.

While the central bank did not adjust the supply of money via interest rates, it did signal unpegging the currency was the “first step” in tightening monetary policy.

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The bank’s statement said: “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.”

Petr Krpata, chief EMEA FX and IR strategist, ING, said: “While limited so far, we can still see some more pronounced moves if large quantities of investors “blink” and decide to close their short euro/koruna positions. So although the price action was not disorderly so far, it is too early to rule out more pronounced moves. But so far, so good and no disorderly moves in the spot.”

The relative lack of market chaos led to favourable comparisons with the unpegging of the Swiss franc. The Swiss central bank unpegged its currency in January 2015 without warning, sending the value of the franc soaring by around 19 per cent.

Kathleen Brooks, research director at City Index, said: “If you want to drop a currency peg, then the CNB can show you how to do it. After dropping the EUR/CZK peg earlier today the koruna has rallied less than one per cent versus the euro, and volatility has been moderate.”

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