Czech Koruna: CNB alignment may weigh CZK against Euro – BNY

Geoff Yu at BNY Mellon highlights that Czech National Bank policy expectations have risen alongside the ECB, yet the Czech Koruna is sliding on a nominal effective basis. He argues that closely matching Eurozone tightening may amplify growth headwinds and that credible domestic stimulus could be rewarded in a market focused on structural growth.

Risks from shadowing ECB

"Smaller European economies integrated into the Eurozone supply chain often must move in line with the ECB. But aligning the domestic economy with sub-optimal policy, with or without a currency board, is also risky."

"The market has pushed up the Czech National Bank’s expected policy path as well, yet on a nominal effective exchange rate (NEER) basis, CZK is drifting back toward the lows of the year. While it’s easy to blame the recent fall in inflation for turning policy expectations around, the sharp rise in policy pricing in May did not help the currency either."

"The CNB may need a clean break with the ECB. The industrial links between Czechia and the Eurozone mean that if current ECB policy is hurting growth, the Czech economy is unlikely to perform well."

"Matching the ECB may even amplify the adverse effect. If the export channel is structurally weaker, domestic stimulus should be considered."

"Czechia has rightly prided itself on avoiding some of the fiscal excesses seen elsewhere in Central and Eastern Europe. In a growth-focused market, credible stimulus may now be rewarded, as much as German assets repriced materially in 2025, with a meaningful benefit for the EUR."