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June 7th 2005

Croatia’s Euro peg comes under fire

Croatia’s national currency, the Kuna, is currently pegged to the Euro. The currency is constrained by bands, which prevent it from fluctuating more than 15% against the Euro. The Central Bank has announced that it may not longer be able to support the peg, but the reason is not intuitive. Amateur economists might consider the recent drama surrounding the EU and the Euro’s subsequent depreciation, but this would be incorrect. The true reason is a gradual inflow of capital into Croatia has exerted upward pressure on the Kuna.  Spurred by higher interest rates, many banks have exchanged Euros for Kunas, driving the currency to new highs against the Euro. In response, Croatia’s Central Bank has flooded the market with Kunas, to ‘sterilize’ the capital inflows and prevent the currency from appreciating.  The Central Bank, however, has informed the public that this type of intervention cannot be sustained. The Financial Times reports:

[A representative of the Central bank] added that the current arrangement, which permits the kuna to float against the euro within a 15 per cent "price corridor" could not be preserved unless market forces were restrained. The system is sustainable, but the costs of sustaining it are higher and higher," he said.

Read More: Croatia’s central bank fights pressure on euro-peg

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Posted by Adam Kritzer | in Central Banks, Euro | No Comments »

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