Final Word from Thursday, June 28, 2018

More important than yesterday's appointment of a new Czech government was the decision of the Czech National Bank to raise interest rates. It was the fourth increase since the competitive devaluation of the crown officially ended on April 6, 2017, but it was the first increase since Vice Gov. Mojmír Hampl made it clear that the CNB does not intend to unwind the multibillion-euro position it created during the 41 months of managed devaluation. Instead of withdrawing the Kč 2 trillion in newly created money as a way to reverse the depreciation, the CNB is raising interest rates. The huge reserves will be kept to defend against a speculative attack, Hampl said. The U.S. is raising interest rates and attracting away capital, Gov. Jiří Rusnok said yesterday, so the CNB is raising its rates too. This is in effect a policy of competitive revaluation based on interest rates. It might please crown-denominated creditors, but it should scare the hell out of crown-denominated debtors. [Czech Republic intervention Great Devaluation of the Czech Crown foreign]