Czech central bank’s foreign exchange reserves fall further in June amid interventions

PRAGUE, July 8 (Reuters) – The Czech National Bank’s foreign exchange reserves fell to 151.3 billion euros at the end of June from a revised 156.4 billion in May, the central bank said on Friday.

The central bank has been intervening in the foreign exchange market since mid-May, selling euros to avoid excessive weakening of the krone. A weaker koruna would exacerbate inflationary pressures via higher import prices.

Since mid-May, the krone had been trading in a range of 24,500 to 24,800 to the euro, while its peers in the region, the Polish zloty and the Hungarian forint, went through volatile sessions.

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The central bank announced on Friday that it sold 3.5 billion euros in spot transactions in May.

Analysts estimate that the central bank spent around 8.5 billion euros at the end of June in the interventions. This represents 5.3% of the CNB’s reserves at the end of April, or nearly 3.6% of the Czech Republic’s gross domestic product.

“Pressure on the krone to weaken is likely to persist for some time…we suspect either the central bank will continue its interventions or the new board will eventually come up with another rate hike” , said Komercni Banka analyst Jaromir Gec.

A weaker krone would work against the bank’s efforts to tighten monetary policy amid soaring inflation, which hit 16.0% in May. The central bank has raised its main interest rate (CZCBIR=ECI) by 675 basis points to 7.00% over the past year.

Governor Ales Michl, who took office on July 1 and whose appointment sparked a krona sell-off in May as he opposed policy tightening, pledged to offer rate stability.

Some analysts have pointed out that interventions need not be seen as something negative.

“This is a ‘normalization’ to some extent of the central bank’s foreign exchange exposure in 2013-2017,” said Jakub Seidler, chief economist at the Czech Banking Association.

The central bank had kept the krone at 27 per euro or lower then, buying euros worth an estimated 2 trillion kroner.

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Reporting by Robert Muller; Editing by Michael Kahn and Clarence Fernandez

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