Česká národní banka


CNB > Monetary policy > CNB Board decisions > 2018 > Transcript of the questions and answers from the press conference

Transcript of the questions and answers from the press conference

27 Jun 2018

How was your decision influenced by the weaker koruna than you perhaps originally expected?

As I said in the statement, the koruna is one of the two components of our monetary conditions, i.e. the koruna-euro exchange rate and interest rates. Together they form the monetary conditions. We are working towards gradually tightening them, or something we call normalising monetary policy, i.e. a path towards monetary conditions set broadly in line with the current phase of the business cycle. The koruna has reversed its trend in recent weeks, at least for the short term, I assume. It has stopped appreciating in nominal terms and weakened slightly. So of course this has opened room for roughly maintaining the degree of tightness of the monetary conditions or tightening them further in the interest rate component. So, from this perspective, the koruna is of course important for our decision-making. It’s not the target of our decision-making. It’s not our key parameter. Nonetheless, it does create the key conditions in the economy in terms of its functioning. So of course it contributed fundamentally to the debate and our considerations of raising interest rates faster.

With your decision today have you already responded to the need to tighten monetary policy stemming from the data available since the most recent forecast? Or are the data over the last six weeks such that it will be necessary to increase interest rates further, possibly at the very next meeting? Or will you give yourself more room now and a further step will be needed maybe after one or two quarters, or towards the end of the year as expected in the forecast?

Generally speaking, the main story of our forecast is unchanged. It still holds true that the Czech economy is in a phase of strong growth. It is above its potential capacity to some extent. There’s a question as to how much, but that can only ever be ascertained precisely ex post. In some respects, it turns out that it is probably significantly above its growth potential. We can say it’s overheating. We can see that especially on the labour market and in the associated wage growth. We can see it to some extent perhaps in property prices. So, that story has not changed. The external circumstances have changed. On the one hand they are generating a number of new uncertainties, many of which we did not see roughly six weeks ago. They weren’t visible on the horizon at all. Now we can see them more clearly. However, they are still uncertainties that are very difficult to quantify for monetary policy decision-making. One change is that there is an outflow of capital from, say, smaller and “emerging” markets due to developments in the USA – the normalisation of rates by the US central bank – and other circumstances that can be estimated going forward. So that also concerns us in a way, of course. Above all, it concerns our exchange rate, as I mentioned earlier. For the moment, I think our reaction to this is appropriate. We were very sure when deciding today that we didn’t need to wait for any further data to become available during the summer and that we could make the standard increase of 0.25 percentage point today without any great risk.

How the situation will look in several weeks or months’ time is hard to predict at the moment. We expect the main story of the forecast to be more or less borne out. The Czech economy will continue to grow, albeit at a slightly slowing pace. It will continue to face a shortage of labour and some exhaustion of capacity in specific areas. It will continue to have solid external results in terms of external economic balance, be it the trade balance or the balance of payments. We continue to expect no dramatic developments in the fiscal area. So, it seems the trend we have set will continue, although it is currently very difficult to estimate at what speed and intensity. We are leaving this open for new data and the new forecast. It may be that this increase will be enough for the time being. But if we conclude that we can go further on the path towards, say, equilibrium interest rates, we won’t hesitate to do so.

Given the degree of deviation of the koruna from the forecast, did you consider at all the option of a larger tightening today, for example by 50 basis points? Was that mentioned at the meeting at all? If so, what were the arguments for and against? And, partly in connection with that, could you express your feelings or opinion about the fact that before the meeting today the money market was expecting two interest rate increases for the rest of the year. So one more increase is still expected by the end of the year. And despite these expectations, the koruna deviated so markedly from the forecast, effectively easing the monetary conditions. Actually, the reaction to today’s decision is no major appreciation. What are your feelings about this or your explanation of it?

And, if I may, one more question partly related to the communications of the Bank Board members, specifically the fact that the interest rate change today was the first change in many many years to have taken place outside the “large” meetings with a forecast. You have already partly explained this by saying you were sufficiently sure. Nevertheless, I wonder if the fact that the decision was taken outside the large meeting should be perceived as a signal of urgency or panic, or conversely if it should possibly be perceived as a change in decision-making style towards, say, greater flexibility and adaptability than we have been accustomed to in the past.

I’ll start with the second part of the question. No, this is no change in the Czech National Bank’s monetary policy decision-making paradigm. As I said, at the meeting today we had such convincing reasons for not waiting for the “large” forecast and for taking the step in the standard way that we decided accordingly. Circumstances really can change. We did not – and this is related to your first question – we did not discuss, and no such proposal was put forward, that we might move in a more forceful step with an increase of 50 basis points, or theoretically even more. Certainly not, because we are certainly in no urgent situation. I want to stress that in a country that has a floating exchange rate (although we call it a managed float) and is a relatively small open economy, exchange rate movements of up to about 5% are, in my opinion, something perfectly normal. If you look at nearby countries, the latest developments have led to such changes there – the Hungarian forint, the Polish zloty. Look at the currencies of some Latin American countries, where the movements are much larger. The global financial market has gone through a wave of movements of “hot” capital from emerging markets to the safer and currently perhaps more profitable waters of the USA. In this context, we have been hit to a relatively small degree, although the effects have been visible in our country as well. We must also bear in mind that we still have large exposures of foreign investors, non-residents, which of course are a legacy of previous developments and previous monetary policies. We must also take that into account. And that too determines the situation in a way, of course. However, this doesn’t mean we wouldn’t have experienced this situation if those exposures did not exist. Such exposures don’t exist to such an extent in neighbouring countries and the developments there are very similar. So it doesn’t mean anything unusual. It doesn’t even mean a change to the standard and traditional mode where we tend to decide, if possible, at the “large” meetings with the large forecast and the large situation report. However, today the situation was so clear that there was no reason to postpone the decision. And, as I already answered, an increase of 50 basis points wasn’t discussed.

As for the market reaction…

…and perhaps just the fact that the market had already priced in 50 basis points before this meeting. Despite those expectations, the koruna remained 1.5% weaker on average than your forecast. So in fact there was a decrease in rates equivalent to that 1.5%.

I’d like to stress that we don’t target the koruna. We give no commitment with respect to the koruna exchange rate level. It’s not our key instrument in terms of setting it. We are a very transparent central bank. We are probably one of the few central banks in the world to publish the forecasted path of the exchange rate as part of our model communication – as the level consistent with the other components of the forecast that we publish, we comment upon and we use as the basis for our decisions. So the fact that the exchange rate deviates from our forecast – in the model, as it is not a commitment – is normal. We pointed that out when we returned to publishing the exchange rate forecast. We will continue to do so. So that doesn’t worry us, as I already said. We will see how things develop in general. On the one hand, the exchange rate is weaker and would open more room for increasing rates. On the other hand, we do see a cooling in the economy, albeit a very gradual one. We see many uncertainties, particularly abroad, which could gradually transform into, or materialise in the form of dwindling external demand and complications on the foreign market. So the situation is not clear-cut in this respect. It wouldn’t be good to deal with it now with a big, long commitment in advance to certainly do this or that, because times are uncertain. We must therefore react flexibly in this respect. Our main story, which I mentioned at the beginning, still holds. Nothing has changed about that. We do not expect a recession or anything like that to occur here in the next few quarters. Not at all. However, the overall picture is complicated. On the one hand, there are clear inflationary tendencies, connected among other things with the exchange rate not appreciating. It has stopped appreciating and will probably appreciate rather more slowly. On the other hand, as I said, there are uncertainties on the supply side, especially abroad. So, for the moment, there is nothing more we can and want to say about this. We will see in six weeks when we have our next meeting. We can decide there again as needed.

You mentioned foreign uncertainties. Which ones did you have in mind specifically?

We can see that demand, or economic output, is slowing in the key euro area countries. We can see that some leading indicators – some indices – are weaker, be it the PMI or the indices of some research institutes. We can see, in a way, increasing conflicts in the trade policy area, although their materialisation is of course very uncertain for the time being and they are extremely difficult to quantify. We can see that Brexit, the date of which is nearing, is not looking any clearer than it did a few months ago – what the arrangements will be. Its impacts may also be significant for a part of the European economy, including us. We can see some developments in prices of commodities, especially oil. We can see some dramatic developments in certain large emerging markets. So, there are a lot of uncertainties. I’m sure I have left out some of them. They are certainly not decreasing in number.

The Czech koruna has been below the Czech National Bank’s forecast for some time now. I would like to know if, in the discussion today, you considered opening a different topic, namely the deployment of a measure other than interest rates. For example, did you consider selling the accumulated foreign exchange reserves?

We certainly did not consider that. The situation really isn’t at all dramatic. I emphasise that again. We will have to get used to that in this country: if we want to have our own currency, a currency that is fair in terms of its exchange rate, which moves in the market and whose price is formed there, we have to expect the currency to be volatile. There’s no other way. There are no small open economies with a floating exchange rate that have not experienced some fluctuations. We are among the countries with the lowest exchange rate volatility. So, we do have fluctuations. There are and will be minor fluctuations. We certainly didn’t consider deploying the foreign exchangereserves. The reserves are something like a nuclear briefcase – they are used only when the situation is really very bad. And that is by no means our case.