Czech central bank’s FX reserves drop further in June amid interventions

PRAGUE (Reuters) -The Czech National Bank’s foreign exchange reserves declined to 151.3 billion euros by 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 prevent the crown from excessive weakening. A weaker crown would exacerbate inflation pressures via higher import prices.

Since mid-May, the crown has been trading in a range of 24.500 to 24.800 per euro, while its peers in the region, Poland’s zloty and Hungary’s forint, went through volatile sessions.

The central bank said on Friday it sold 3.5 billion euros in spot operations in May.

Analysts estimate that the central bank spent around 8.5 billion euros by the end of June in the interventions. That 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.

“The pressure on the crown to weaken will likely persist for some time… we assume that the central bank will either continue with the interventions, or the new board will eventually deliver another rate hike,” said Komercni Banka analyst Jaromir Gec.

A weaker crown would play against the bank’s effort to tighten monetary policy amid soaring inflation, which hit 16.0% in May. The central bank raised its main interest rate 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 crown sell-off in May as he has opposed the policy tightening, pledged to propose rate stability.

Some analysts pointed out that the interventions don’t need to be taken as something negative.

“It is a ‘normalisation’ to a certain extent of the central bank’s foreign exchange commitment in 2013-2017,” said Jakub Seidler, Czech Banking Association chief economist.

The central bank had kept the crown at 27 per euro or weaker then, buying euros worth estimated 2 trillion crowns.

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