Czech koruna likely to witness renewed appreciation if CNB adopts rate hike at next week’s meeting, says Commerzbank

The Czech koruna is expected to witness a renewed appreciation if the country’s central bank will decide on a further rate hike at next week’s meeting, according to the latest research report from Commerzbank.

It is hardly surprising that the Czech koruna was unable to escape the renewed risk-off wave on the FX markets and that it is trading at lower levels since the start of the week. For a small open economy like the Czech Republic, the prospects of a constantly deteriorating trade conflict principally constitutes a burden. Moreover the latest data on inflation came in above expectations.

The interesting question this throws up is how the central bank (CNB) will react in terms of its interest rate policy. It had originally assumed that a more restrictive monetary policy this year would lead to an appreciating koruna. This was intended to cool down the booming economy. Clearly that is not going to be the case now.

At currently CZK25.57 against the euro, the quarterly average so far is well above the 25.20 projected by the CNB as recently as May. That is no reason to panic but sufficient reason for an increasing number of the CNB’s monetary policy council members to consider an early rate hike, the report added.