The Czech Republic has joined the currency war

The Czech National Bank (Ceska Narodni Banka - CNB) yesterday approved the first sale of Czech korunas from its reserves in more than a decade, leading to a depreciation of up 4.4 of the Czech koruna (CZK) against the Euro, Bloomberg reports.

The Euro/ CZK exchange rate rose 3.2% in just four minutes, from 25.79 CZK/euro to 26.62 CZK/Euro, according to data provided by the press agency. After a slight drop, for seven minutes, to 26.5 CZK/euro, it resumed its rise, reaching a daily high of 26.97 CZK/euro, around 15:00.

According to Bloomberg, yesterday's depreciation of the Czech koruna is the greatest intraday move since 1999, when the agency began tracking the Euro/CZK pair. The performance of the koruna was the worst in a group of 31 currencies of emerging countries' economies, the quoted source says.

The officials of the Czech national bank yesterday said that they intend to intervene in order to keep the Euro/ CZK exchange rate around 27 korunas/euro.

The measure of the CNB represents an attempt to competitively devalue the Czech currency, but which will not yield the desired results, economic analyst Călin Rechea think. "It is an ineffective measure, which will only result in impoverishing the local population, considering that there is competitive devaluation going on all over the world", he said.

Competitive devaluation comprises actions by which a country attempts to weaken its currency, according to specialized literature. The problem with such a measure is that it encourages other countries to do the same, leading to a currency war, which limits any benefits gained through that action to a short period of time. Also, the depreciation of the local currency can generate inflation, canceling any increase in competitiveness over time, specialists note.

Exports-based economic growth can not represent a solution for every country in the world, as these exports need to have markets to absorb them, Călin Rechea warns.

The issue of the global economy is the production surplus, caused by excessive lending and which generates goods for which is no demand, he explains.

"When even China, which has a domestic market which has billions of consumers, is faced with a production surplus, what will the other countries do?", the analyst said, who continues: "Without an adjustment that would also involve the closing down of production units making products for which there is no demand, economic growth can not resume. Measures such the one taken by the Czech Central Bank are artificial, and if they are stopped, they lead to disappearing demand for the goods in question".

The measure of the CNB comes as the policy rate in the Czech Republic is at a historic low of 0.05%, and the inflation rate is the lowest it has been in the last three years and a half, Bloomberg writes.

After the three successive interest rate cuts, which happened last year, have removed the room for traditional monetary policy measures, the Czech authorities are attempting to reduce the risk of inflation, according to the news agency. The Czech republic has seen an economic growth of 0.7% in the second quarter of this year, compared to the previous quarter, thus ending, according to Eurostat data, a recession which lasted six quarters.