As of Thursday, the Czech National Bank (ČNB) started to disclose forecasts of its currency exchange rate moves as the only central bank in the world. And ČNB governor Zdeněk Tůma used the opportunity for a verbal intervention in support of the crown.
Even though the ČNB on Thursday released a forecast predicting the Czech economy would fall into a recession, it regards the current exchange rate around CZK 28 per euro as exaggerated. “Like the crown quite apparently overshot towards gains last year, now we think that it overshot in the opposite direction,” said Tůma. According to the ČNB, the average exchange rate to the euro should reach CZK 25.80 this year and CZK 25.60 in 2010.
Most analysts forecast the crown would be weaker, expecting a fall to CZK 30 per euro by the end of June. Experts from the investment bank Goldman Sachs have even said recently that the euro could cost as much as CZK 32 within six months.
That would be really a deep fall compared with July 2008 values – at that time the euro traded below CZK 23, its lowest ever against the Czech currency.
Tůma admitted that the exchange rate is the most volatile indicator that the ČNB releases forecasts for. At the moment, for example, the actual rate of the crown is much weaker than the average predicted for the first quarter of the year.
“It is not any commitment or objective. We want to make our decision-making more transparent and comprehensive,” Tůma said on the reason why the central bank started to release the forecasts.
And the crown benefited from the news. While the Thursday 0.5-point interest rate cut to 1.75% was expected by the market, the forecast for a stronger crown and suggestion that rates could not fall much in future boosted the currency considerably – within two hours the crown added 1.5% to CZK 27.8 per euro.
The reasons behind the weak crown can include investors’ general lack of confidence in the central and eastern European region, but also the actual situation in economies, Tůma said. “I think that the situation in individual countries is not distinguished sufficiently,” he added.
With this statement, he has joined some analysts who say that large global investors do not distinguish between the Czech Republic and let’s say Hungary where the economic situation is much worse compared with the Czech Republic. Analysts polled by the German daily Die Welt said that the Czech Republic, Poland and Hungary would face a hard hit due to their currencies. But the situation in the Czech Republic is not as alarming as it is in the other two countries – its foreign debt is not that big.
Owing to the impacts of the crisis, Poland may have to postpone euro adoption planned for 2012. The country’s PM Donald Tusk admitted that the entry into the exchange rate mechanism ERM-2, scheduled for the middle of the year, might be put off if the move is too risky.
