Transcript of the questions and answers from the press conference

Two questions. Could you please tell us the arguments of the Bank Board member who voted to leave interest rates unchanged. How did the rest of the Bank Board answer those arguments? What were the counterarguments?

The second question is, given that, as you mentioned, the koruna was broadly in line with the forecast, or even slightly stronger, in this quarter, what do you infer from this for the future? Does this in any way change the probability of one more rate hike occurring in the remainder of this year, which the forecast and some Bank Board members have suggested is possible?

I will attempt to describe the debate, but of course the name of the colleague who didn’t join the others in voting for a rate increase will be disclosed in due course, i.e. in about a week’s time in the minutes of the meeting, so I can’t go into much detail now. Moreover, it would take a long time. The concerns of that one Bank Board member can basically be summed up as follows. He is aware that the forecast is materialising and predicts today’s rate increase. However, he is slightly worried that we are the only central bank far and wide that is raising rates so rhythmically and vehemently. He wonders whether this could theoretically lead to too great a tightening of the monetary conditions for our real economy, for our corporate sector. He would perhaps prefer a more gradual tightening. That was the argumentation in a nutshell. It was much broader and richer, of course, but you will learn that partly from the minutes of the meeting, which will be published on 5 October.

The counterarguments were based, of course, on the position of the forecast. The forecast is materialising. The deviations of the new data obtained in the meantime since August from the forecast are absolutely minimal. Our GRIP – the chart you will see soon – in fact shows that we are almost at the midpoint the way it’s calibrated. But that is all connected with the fact that the forecast already assumes that this rate hike will take place. Last time it assumed a hike of 50 points theoretically. But we said no, we don’t want to go in sharp jumps, we want to go gradually, in a predictable way. We are announcing this in advance. All the fundamentals of the Czech economy – inflation, wage growth, the labour market and all the rest – are confirming what the forecast assumed, so there’s no reason not to take this step. Otherwise, if we didn’t do it, we’d be outside the framework of the forecast. I recall that we are tasked with maintaining price stability, which is expressed as hitting the inflation target. We are also supposed to ensure financial stability, which is defined more broadly, but we know what it involves. And from both these perspectives, it’s clear that the rate increase is desirable – from the price stability point of view, so that we can gradually and safely steer inflation close to the target. We are now slightly above the target but within the tolerance band, but we expect that we’ll gradually return to the target because of the active steps we’re taking. It’s similar in the area of macroprudential policy. It’s consistent with establishing some cooling of the very relaxed credit conditions we have at the moment. We must be aware that we in fact still have negative interest rates in real terms. With inflation above 2%, even mortgage rates – average mortgage rates – are around zero. In individual cases they may even be slightly negative in real terms.

As for the koruna, yes, the koruna is now more or less in line with the forecast. Our forecast – to emphasise it again – isn’t a commitment, it’s a part of the model system. I’d say it has no specific implications for the nearest Bank Board decisions. Next time we’ll decide on the basis of the new forecast, which is a qualitative shift. We’ll have a lot of new data, but above all we’ll have new model calculations, a new forecast as a comprehensive picture of the economy. We’ll decide on the basis of that report. Of course, it’s a general rule with us that the monetary mix and the monetary conditions are always strongly determined by the exchange rate and interest rates. So that will of course play a role. At the moment, though, I wouldn’t infer any specific consequences.

Two questions. It has already been hinted here that the interest rate will probably go up further by the year-end. Can you say already whether November or December is more likely?

The second question: you have increased interest rates several times this year. You have also adopted a measure on access to mortgages. If the Czech economy were to cool – and some uncertainties were mentioned – or God forbid if a crisis were to occur, is the Czech economy prepared for that?

Today we didn’t announce – and we are not announcing now in my talk here – any commitment to increase rates further by the year-end. We are saying that it’s consistent with the forecast we now have – I know this is a bit overcomplicated for the general public – that rates should go up gradually further towards the normal level, which is somewhere around 2.5–3%, other things being equal. However, we’re not saying that this will necessarily be by the year-end. Maybe it will, maybe it won’t. We’ll see. There’ll be a new forecast. It will give us a new picture. So we can’t rule it out, as we see certain persistent inflation pressures in the economy. This is connected with the fact that the economy is overheating slightly. That is most visible in the labour market. In a way there’s a shortage not only of labour, but also of capacity in general. That’s showing in different areas. It’s exerting upward pressure on prices not only on the cost side, but now also on the demand side. We must respond to that, so that we steer that price growth in advance. We won’t solve now what will happen one quarter ahead. But we would like to have control over what happens a year or a year and a half from now. So that doesn’t rule out a further rate increase still this year. I really can’t tell now whether it will be November, or later, or at some other time, early next year.

As to whether the Czech economy is prepared: hardly any economy is ever prepared sufficiently or fully for a crisis. We’re doing everything to be able to say that the Czech economy is prepared very solidly in the areas of monetary policy and financial stability. First of all, there is no crisis on the horizon at the moment. I want to emphasise that. Our figures are showing no such thing. There’s no reason for it. Of course, as a small open economy we can be hit at any time by a global swing that is beyond our control and we have little influence over. However, that’s a general uncertainty we are talking about. So far it doesn’t look like materialising into anything you could call a crisis or recession or anything like that. So there’s no such thing on the horizon. On the contrary, our outlook says that solid economic growth somewhere around 3% will continue next year and probably also in 2020. The fact that we’re now gradually and slowly raising interest rates is one of the steps towards being more resilient to a future crisis or fluctuation, as it gives us some room for monetary policy to be able to react to adverse future developments. So that was also mentioned in the debate. There isn’t much to wait for, now that all the conditions for the next small or minor rate hike have been met. So let’s do it, because we don’t know what the situation will be one or two quarters ahead. As for it making us different from many other central banks, that’s basically an advantage from our perspective. We have some comfort in that we need not fear any dramatic potential impacts of the fact that we changed the direction of our monetary policy about a year ago and are heading towards a normal situation. In the world around us the situation is still very atypical, abnormal in a way – negative interest rates, zero interest rates, even the phasing out of quantitative easing, or capital market interventions. We are taking that into account and monitoring it, but fortunately we’re not in a situation that prevents us from taking what we consider to be a normal, standard course. I’m convinced that we’re also creating a situation in which the Czech economy will be better prepared to face the challenges stemming from a future fluctuation. However, the preparedness of the economy can’t be ensured by the central bank and monetary policy alone. What is even more important, or no less important, is that public finances are ready for that situation and have a buffer to be able to react together with us, be it in the form of very low debt or in the form of a reserve fund, although that probably isn’t very realistic in our case.

We all know, of course, that a crisis will come – the experts are saying in two years at the most. The Western economy is a house of cards, says Paul Craig Roberts. He was Reagan’s chief economist and head of a Presidential Committee with subpoena power over the CIA, so he probably knows what he’s talking about. Enough politics, my question is as follows. Aren’t you considering changing the exchange rate regime a bit, from floating to fixed, revaluing the koruna, simply starting to behave normally? Tourists in the Old Town Square in Prague are willing to accept 16 or 18 korunas to the euro. You are taking away the licences of those bureaux de change. That’s outrageous. Will you adapt to the market, or will you stick to the models you have, determined by the IMF? The point is that we are going to crash into a wall, and it will hurt.

I’m not sure exactly which part of the question I should answer, but I’ll try. We certainly won’t do any experiments, because that certainly wouldn’t enhance our resilience to the possible future fluctuations you mentioned. We’ll stick to the tried-and-trusted model, which has so far always kept the Czech Republic among the countries with a very stable financial and monetary environment.

The Czech Republic has very stable prices. Few countries of this economic significance and economic level can present such a long time series of very solid price stability. We have very decent financial stability. We are one of the few countries that didn’t have to use public finances to bail out financial institutions in the most recent crisis. We have – at least according to international assessments – a very active macroprudential policy, i.e. a policy ensuring financial stability, in this country. Czech banks are among the soundest in Europe. So, taking steps that would deprive us of these – I would say – advantages in today’s world would seem to me like throwing oneself off a bridge. With all due respect, I see no reason to follow such recommendations.

As for the rest, I guess it was too sophisticated for me. It was most certainly off-topic…

…you steer inflation but you don’t steer the money supply. Two presidents who appointed the Bank Board, Mr Klaus and Mr Zeman, have pointed that out. And the exchange rate is simply unbelievable. It was all heading towards appreciation of the koruna. And suddenly you started buying – in the Singer era and in your era – overpriced euros. I don’t know who is speculating in them, how and with what results. But simply those normal people, tourists, are coming and saying “Yes, it’s fine if we get 16 or 18 korunas to the euro, it’s OK”. That’s your job, isn’t it?

Markéta Fišerová, CNB Spokesperson: Please ask questions regarding today’s monetary policy meeting rather than broad questions of this kind.

About two weeks ago you said that you saw one more increase this year as a strong scenario. I want to ask whether today’s Bank Board meeting changed anything about your view.

It didn’t change anything substantial about my view of the trend we’re now experiencing in the medium or short term and which we’re evaluating. As I said already, we’ll have a new forecast. There are many uncertainties and we have to reconsider things. It really isn’t that important whether it takes place this year or early next year. It’s very likely that the next step will be an increase, but we don’t know exactly when.

I want to ask an additional question regarding the koruna position of foreign investors, which according to data on Czech government bond holdings and data on short-term external debt has recently been very stable and remains very high compared to the pre-intervention period. Are you monitoring this? What do you infer from this stability? Is it positive or negative from your perspective? Do you see any risks in it going forward, for example when the ECB and neighbouring countries in Central and Eastern Europe start raising interest rates?

Yes, we’re monitoring this. It’s a relevant piece of information for us. However, we have seen great stability of this indicator in recent months. That’s a sign that investors have truly established themselves as medium-term investors in Czech bonds and evidently expect higher returns, which they are of course getting thanks to our higher interest rates compared with the euro area. I don’t expect anything to change substantially in this respect. Even if the ECB in particular – as other markets are less relevant – later starts increasing rates gradually, a rather attractive interest rate differential will probably persist for holders of Czech bonds denominated in Czech koruna. We’re monitoring this. It’s an interesting piece of information for us. We see no major risks in it, as there’s no real reason for investors to start fleeing and panic-selling Czech bonds, which of course would have an effect on the koruna. But there are no reasons for that, so the current situation is normal and stable.

Today’s rate increase is the fourth this year. Are you considering the risk that this pace of raising rates could possibly cause problems in our economy which your current forecast perhaps doesn’t take into account yet?

We consider the whole context of our actions, of course, and this is understandably a part of that. To some extent, it’s along the lines of the dissenting vote at the meeting today. We have no such signals at present. The availability of credit isn’t worsening. Credit prices aren’t rising dramatically. We must take into account the fact that the Czech banking sector is very liquid, perhaps even too liquid, so it is very interested in using its funds on the market. Moreover, the attractiveness for the banking sector isn’t worsening in any way, as the ability to maintain credit margins is basically improving owing to the current market situation. So we aren’t seeing or hearing any signs of worse availability of financing for the real economy. After all, firms have an alternative, namely borrowing in foreign currency, especially the euro, which is happening for understandable reasons, mainly due to hedging against exchange rate risk. So we’re not afraid of any damage to the real economy for now. As I said, we still have negative real interest rates when you take inflation into account. So the availability of money is still very good. At the moment it’s not an argument for us to give up the option of moving closer to normal interest rate levels. Moreover, the economy is above its potential according to all estimates. It’s overheating slightly, so it doesn’t need any monetary policy stimulation. On top of that, we have some – not dramatic, but slight – degree of fiscal expansion. So with regard to keeping the conditions balanced, I think our policy is appropriate at the moment.