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Czech central bank lifts exchange rate cap

The Czech National Bank ended interventions aimed at preventing the local currency from strengthening below 27 to the euro and returned to its conventional monetary policy, in which interest rates are the main tool.

The regulator said the conditions for the sustainable fulfillment of its 2% inflation target have been met and that capping the koruna was no longer necessary to accomplish its primary objective of price stability. Following the removal of the cap, introduced in late 2013, the central bank expects the exchange rate to fluctuate in either direction in the short term, but said it was ready to use instruments at hand to prevent excessive volatility.

The exchange rate fluctuations were moderate one day after the removal of the cap, but analysts expect the Czech currency to remain volatile, with many investors waiting for bigger gains before taking their profit on the currency, Reuters reported April 7.

Raiffeisen analyst Wolfgang Ernst said in a note cited by the newswire that the Czech currency could strengthen to 26 koruna to the euro by the end of 2017, while an analyst poll cited by the newswire on April 6 and carried out before the cap removal indicated the koruna could gain 5% over the next year.

Market participants believe that the Czech regulator is unlikely to intervene to prevent excessive fluctuations unless the currency leaves the corridor of between 25 koruna and 28 koruna to the euro or even 25 koruna and 29 koruna to the euro, the newswire said.

The rate at which the koruna settles after the initial volatility period will determine how quickly the Czech regulator will move to increase interest rates, which stand at 0.05%, Reuters noted. The next central bank monetary policy meeting is scheduled for May 4, but Governor Jirí Rusnok said that could be too early to decide on the rates.

As of April 6, €1 was equivalent to 26.61 Czech koruny.