CZK Firms after CNB Delivers First EU Rate Hike for Years

  • Crown jumps as CNB lifts rates, surprising part of the market
  • Hike is the CNB’s first since 2018, EU’s first since 2012
  • CEE central banks unlikely to follow CNB’s hike this year
  • The crown surged on Thursday after the Czech central bank (CNB) delivered the European Union’s first central bank interest rate hike for more than five years to fight inflation.

    The 20 basis point hike in the two-week repo rate to 0.25 percent had not been expected by half of the analysts in a Reuters poll, and had not been priced in by markets.

    It was the first Czech rate rise since 2008. The crown touched 25.9 against the euro, its strongest level since April when the CNB abandoned a cap which had kept the crown weaker than 27 since late 2013. It traded at 25.965 by 1139 GMT, up half a percent.

    Czech interest rates swaps (IRSs) ticked up around 5 basis points, short-end forward rate agreements rose 10 basis points and bond bid/ask spreads widened, but few deals were struck.

    The crown, which weakened to a one-month low of 26.172 earlier this week, traded at the levels where analysts in a Reuters poll projected it to be at the end of this month.

    The poll predicted a gradual strengthening to 25.5 in the next 12 months, and projected stronger than expected courses for the region’s main currencies, with Europe’s economic growth powering ahead.

    The Czech economy is also picking up. With inflation running at 2.3 percent in June, above the 2 percent midpoint of the target range, the CNB had become the first central bank in the region which indicated that rate tightening could come soon.

    Reuters

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    Dean Popplewell

    Dean Popplewell

    Vice-President of Market Analysis at MarketPulse
    Dean Popplewell has nearly two decades of experience trading currencies and fixed income instruments. He has a deep understanding of market fundamentals and the impact of global events on capital markets. He is respected among professional traders for his skilled analysis and career history as global head of trading for firms such as Scotia Capital and BMO Nesbitt Burns. Since joining OANDA in 2006, Dean has played an instrumental role in driving awareness of the forex market as an emerging asset class for retail investors, as well as providing expert counsel to a number of internal teams on how to best serve clients and industry stakeholders.
    Dean Popplewell