Government calm over record-breaking Czech crown

In the course of the last 12 months the Czech crown has strengthened by a staggering 22 percent, becoming the fastest appreciating currency in the world. While exporters warn that the super-strong crown will inevitably slow down economic growth, the government sees no threat in the current exchange rate.

The Czech crown is breaking records, again. Trading on Monday at 22.94 against the euro and at 14.46 against the US dollar, the koruna is more expensive than ever before. This is certainly good news for the million or so Czech holiday-makers who are travelling abroad during the summer but the strong crown has exporters across the country worrying about the future. Michal Brožka, an analyst for Raiffeisen Bank, says that with all probability, the crown will eventually hit a ceiling.

“It’s a serious problem but we expect that the Czech crown will depreciate, that it will correct its strong appreciation trend. Should this happen, we do not expect any strong negative effects on the Czech economy. If the current trend should continue, however, we would indeed expect strong negative effects on the Czech GDP growth.”

Czech National Bank, photo: Štěpánka Budková

Experts agree the main reason behind the strengthening crown is the fact that investors around the world see the Czech currency as a safe haven amidst global uncertainty triggered by gloomy prospects for the US economy. If the United States overcomes the crisis, the rate of the dollar against the euro will improve and the crown will not appreciate as fast as it is doing right now. This might be the reason why the Czech government has so far refused to intervene and help Czech exporters. Raiffeisen Bank’s analyst Michal Brožka says any such intervention would have to come at a carefully chosen moment.

“Any strategy towards weakening the Czech koruna, could involve a direct intervention. But what we are waiting for is a change in the global sentiment which should eventually weaken the crown. If the Czech central bank chooses the right time, then it could intervene. But before that I would expect some stronger words, a more articulate plan against the appreciation of the Czech crown.”

Jiří Grund

Prime Minister Mirek Topolánek told the daily Hospodářské noviny on Monday that the current rate of the Czech crown did not present a serious threat to the Czech economy, and that interventions by the Czech National Bank were usually expensive and inefficient. The head of the Czech Exports Association Jiří Grund couldn’t disagree more.

“My opinion totally contradicts that of our prime minister. I believe that in the medium-term, we will all feel the negative effects, not just producers or exporters but consumers as a whole. The competitiveness of our industry will decrease; the potential of our economy will drop significantly. In the medium-term, this will lead to many factories closing down and unemployment will rise.”

Despite a growing discrepancy of views of the government on the one hand and Czech industrialists on the other, there is one point on which they all agree: once the crown starts devaluating, its decline will not be as steep as the current appreciating frenzy.