The Czech koruna rallied today after the nation’s central bank surprised markets, raising interest rates despite the threat of a global economic slowdown. Currently, the currency has backed off from the day’s highs but is still trading above the opening level.
The Czech National Bank boosted its benchmark interest rate by a quarter of a percentage point to 2.25%. Other interest rates were lifted as well. The decision surprised market participants. While analysts were predicting a hike, the general consensus was that it would happen later this year. Experts explain the rate lift-off by inflation that stands at 3.2% — above the central bank’s target of 3%. The CNB commented on its decision:
The decision adopted by the Bank Board is underpinned by a new macroeconomic forecast. Consistent with the forecast is a rise in domestic market interest rates initially, followed by a decline in the second half of this year.
The decision was far from being unanimous as four Board members voted for the increase, while three voted for leaving interest rates unchanged.
Economists were concerned that the economic slowdown in the eurozone is spilling over to the Czech economy, but it looks like the Czech policymakers believe that the eurozone economy will recover in the future:
According to the external assumptions of the new forecast, the currently muted economic growth in the effective euro area will be replaced by a gradual acceleration during this year. The recovery in economic growth will be reflected in a gradual increase in foreign producer price inflation.
USD/CZK traded at about 22.7560 as of 15:09 GMT today after opening at 22.7677 and falling to the session minimum of 22.5982. EUR/CZK dropped from 25.0480 to 24.9970, and its session low of 24.8680 was the lowest level since October 2012.
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