CNB to hike countercyclical capital buffer rate to 1 pct from July 2018

On Wednesday, the Czech National Bank announced that it would hike the countercyclical capital buffer rate from 0.5 percent to 1 percent with effect from 1 July 2018. The central bank stated “continued rapid credit growth and a need to create buffers for worse times” as the main reason behind this.

The instrument that is related to Tier I capital of commercial banks should raise the resilience of the financial system to risks linked with the behaviour of the banking sector in the financial cycle.

The CNB might be worried about the valuation of housing prices that it considers as moderately overhauled, noted KBC Research in a research report. Under normal circumstances, the Czech National Bank would already raise the official interest rates but given the relaxed monetary policy of the ECB it would immediately lead to much stronger koruna.

However, the recent central bank’s measure should be seen as tightening of credit and indirectly monetary conditions in the Czech economy, said KBC Research. Therefore, the Czech koruna has been strengthening further and the EUR/CZK pair has been sliding closer and closer to the 26 level. Thus, the exchange rate has been tightening overall monetary conditions further.