CNB has launched frontal attack against strong koruna

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The Czech central bank lowered all key interest rates on Monday and confirmed its intervention on the foreign exchange market. The latest moves are aimed at weakening the strong Czech crown which has been causing problems to the economy. Vladimir Tax has the details.

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In a surprise move, the Czech National Bank has used all the usual monetary policy tools on Monday to launch a frontal attack against the excessively strong currency. First of all, it took brokers by surprise by announcing an extraordinary meeting of the board of governors to discuss monetary policy changes.

Furthermore, the central bank confirmed its direct intervention on the foreign exchange market. Following the intervention the koruna dropped to 32.65 CZK per euro from the previous level of 31.8 crowns per euro.

And third, it slashed interest rates to historic lows in the second rate cut in less than two months. All the interest rates were cut by 25 percentage points, so that the two-week repo rate stands at 4.5 percent, the discount rate at 3.5 percent and the Lombard rate at 5.5 percent.

The move by the Czech Central Bank follows the unveiling earlier this months of a joint plan by the Czech National Bank and the government to fight an overly strong Czech crown and its further strengthening due to expected massive privatization revenues.

Analysts say the crown's strength is mainly the result of the knock-on effect of high levels of foreign direct investment in recent years. While on the one hand, it encourages a rise in labour productivity, helps ensure price stability and keep interest rates down, on the other, it represents a major problem for exporters, as it makes Czech goods more expensive and therefore less competitive abroad.