Transcript of the questions and answers from the press conference

A question regarding the uncertainty surrounding the duration of the negative sentiment towards the koruna. You said the koruna could start appreciating towards the end of the year. Do you expect a specific event, or a specific technical barrier, or something else on the global markets that might theoretically affect that negative sentiment?

One more question, did the Board discuss today the possibility, or the risk, that the negative sentiment might fully disappear or significantly weaken more quickly, from day to day or week to week, and that the koruna might then return very quickly to the originally projected appreciation path and might, in fact, appreciate even more, given that the interest rate differential is now substantially higher than you originally forecasted? Do you see this as a risk to the economy?

We did talk about what we called in working terms persistence of the exchange rate shock. Whether we have the capacity to somehow better estimate the length of the shock and its intensity – probably not. For the time being, we are working in the forecast with the assumption that the shock should fade out over the course of about two quarters and we should return to the original exchange rate appreciation path, of course with a lag. However, we cannot rule out the possibility of the shock fading much more quickly. The international markets are currently subject to great uncertainty – relatively volatility in various trade plans and trade policy statements and of course some additional uncertainties. So, we can’t rule out it fading more quickly and the koruna returning more quickly to the originally projected path. However, the forecast assumes that it will occur in about two quarters.

We don’t target the exchange rate of the koruna. For us, it’s an important additional piece of information showing us what the overall monetary conditions look like, because they consist of both the exchange rate and interest rates. So, we don’t regard this as a big risk. It’s basically a modifying factor for us in terms of how quickly we can go on our way towards neutral rates. But it’s nothing that should fundamentally change our path and thinking in the direction we’re going, that means setting interest rates that will be more in line with the situation of the Czech economy given its certain overheating and the tensions we are already observing, and the phase of the business cycle. So, we debated this. We have no clear-cut conclusions, because we really don’t have the ability to affect, or even forecast, global sentiment in a significant way.

To ask in a simplified way, are the koruna exchange rate and higher inflation the reasons why rates are being increased again after about a month?

Yes, at the moment the weaker exchange rate relative to the originally projected level – as a key component of our forecast and the overall monetary conditions – is giving us room to take the next step in raising interest rates rather earlier that we originally expected. This explains the majority of why we’re doing it now, earlier than we originally expected about half a year or a year ago. At the same time, it holds true that inflation pressures in the Czech economy remain strong. Now, I don’t mean the fact that in a few months dramatic swings may occur in very volatile items such as food and fuels, because we can look past them. However, we see persistent pressure in the form of fairly solid core inflation, that is, inflation adjusted for volatile items, which is also safely on target. And of course labour market tightness is a source of pressure, generating upward pressures on wages, pressures that are very intense and seem to be persistent and will probably linger a bit longer than we originally thought. We’re not as concerned as we have been at some times in the past that inflation will quickly cease to be anchored at a sound level to some extent. So, there’s room for us to raise interest rates earlier than we originally thought. But the main factor explaining why we’re doing this earlier than expected is the opportunity linked with the temporary weakening of the koruna.

You said you expected the koruna to return to an appreciation trend still this year following a small deviation. Will the return to the appreciation trend take care of the warranted further tightening of the monetary conditions? Or do you see it as likely that the central bank will take further action with another rate increase this year?

We are consistently thinking along the lines that there are economic fundamentals speaking in favour of the koruna continuing to appreciate slightly further against the euro in nominal terms. This is due mainly to the fact that the economy is growing markedly faster than the core of the euro area, or the euro area as a whole. At the same time, it holds true that our natural effort is to return to long-run neutral interest rate levels. This is mutually consistent. The decision taken today doesn’t anticipate further steps in any way. We certainly can’t rule out the next step following relatively very soon. If the current conditions broadly remain in place, there’s certainly room for that, I would say basically already at the next monetary meeting – if the conditions remain in place, that is, if for example the exchange rate shock, as we call it, meaning the deviation of the koruna exchange rate from our original path, or the current path newly set today, still persists and if the inflation pressures in the Czech economy clearly persist. As for the former, I don’t venture to predict. Regarding the latter, I’m almost sure that this condition will be met, because the inflation pressures will not subside that fast. Their degree is important, of course. So, we can’t rule out that still this year – and I cannot and will not speculate now at which meeting – we will consider increasing rates further.

The Czech Statistical Office has revised the accounts for several quarters. Was this reflected in the report?

I assume you mean the national accounts. I would say it was certainly reflected in the numerical part of the report, but I don’t think it changed the story of the Czech economy in general. So, yes and no. I don’t think it had any major impact on our decision. It holds true, as we stated, that the Czech economy is still growing very solidly. The pace is slowing this year. That’s why our new forecast, which you will see soon, is a bit weaker with regard to economic growth this year. But for next year, for example, it keeps the originally forecasted pace still solidly above 3%. Except for the labour market and some partial indicators, the growth of the Czech economy is basically very balanced. So, the story of the boom is basically unchanged in this regard. There’s a modest slowdown in the solid growth rate, which, even so, probably remains above the potential of the economy. So there’s a modest overheating. However, the moderate slowdown in fact favours keeping the balance within a range that should not mean any major complications for longer-term stability. I’m not aware of the statistical revision having changed our thinking about the Czech economy in any way.