Transcript of the questions and answers from the press conference

I am interested in the Bank Board’s assessment of the risks. After the previous meeting and the publication of the most recent forecast, the Board agreed that the risks were slightly inflationary. This time there is a shift towards a neutral view of the risks. I want to ask whether this means any change in your view of whether we may see one or two hikes this year, or whether we are closer to the scenario you also mentioned after the previous meeting, i.e. that we may see no hike this year given the evolution of the variables you discussed.

There is a change in situation in the sense that the Monetary Department sees a more balanced current situation compared to the previous monetary policy meeting. However, I wouldn’t view the difference between the two meetings as being that sharp. The fact is that some signals that external demand is weakening markedly have strengthened. But the domestic indicators of overheating of the economy have also weakened substantially. I mentioned slower-than-expected wage growth. The same applies, in particular, to domestic consumption as a component of GDP. The question is, of course, to what extent these swings in the data for the previous quarter will be corrected by new data, and possibly by data revisions with regard to GDP. However, these signals are present. So, the resulting picture is more or less neutral in terms of the risks to inflation.

I think this may not have any strong and fatal impact on the monetary policy decisions in the rest of the year. We try to take account of all possible circumstances when taking our decisions. We also look at the path of interest rates, so that we don’t operate too mechanistically and impetuously. This means that, if today we discussed that there could probably be a slight increase in rates, we also discussed that we could possibly, with a solid probability, see a situation that during the year a need might conversely arise to cut rates again slightly by the same amount. Truth to tell, as the central bank we prefer to be a source of stability rather than to generate fluctuations in such an important economic parameter as interest rates. So, this smoothing tendency, which I think is natural to the central bank, may have played a role in our decision. However, I would also see it as relevant to future meetings, which may again involve an assessment somewhere on the borderline between a slight increase and no change, or a slight decrease.

So the answer is no, this doesn’t predetermine anything. It still holds true, in line with the predictions expressed by some Bank Board members, that this year we could still see either no hike, but easily also one or two hikes. Things will depend very much on what happens in the next few months. We will have a new forecast in May, so that will certainly have a substantial effect.

Could you please give us three main reasons why you didn’t raise interest rates this time?

I don’t know if I’ll be able to express that in a sufficiently exhaustive way, but let’s hope that… On the one hand, of course, we took on board the information coming from new data, as I already mentioned: the slightly higher inflation than we had expected, and, for the quarters ahead, the perhaps uncertain room for further appreciation of the koruna. This is on the side speaking for a hike. But I would like to emphasise that we target future inflation. What we do now determines inflation a year or a year and a half ahead. So, the things that have happened have happened and may be interesting for an analysis of our previous decisions, but at least for me they are not that important for our present decisions.

On the other hand, the reasons not to raise interest rates included growing concerns of a cyclical slowdown of the European and global economy, primarily in our major trading partner countries. In recent weeks, we have seen substantial corrections in the sense of a lowering of the estimates of growth in Germany and Slovakia, our key trading partners. Those were substantial corrections, in contrast to the small corrections for some countries more remote to us, such as France, Spain and Italy. We can see – and, as I said, this may be corrected – a slightly surprising marked decline in domestic consumption growth. According to the most recent data, wages were also distinctly slower than we originally expected. So, those were the reasons not to hurry with a hike. And those reasons prevailed in the end.

Additionally, as I said, some uncertainties – the environment around us speaking more in favour of waiting with a rate hike – have probably increased. They haven’t decreased in number and they are perhaps even more complicated than they were before. So, those were the main reasons for us to take this decision.

You mentioned Brexit as a risk. Did you explicitly discuss today the fact that we still don’t know whether, when and how the UK will leave the EU? Was that a reason not to take the decision today and wait to see how things turn out?

It was one of the items – I would say – lower on the list of reasons not to take the decision now, but not a strong one. It was explicitly mentioned in the debate as one of the reasons, but a less pronounced one than, for example, domestic factors. However, it featured as one of the important foreign factors we mention. In that area, generally, the slowdown in euro area growth was in first place, but Brexit was certainly an additional one.

How do you assess the relatively rapid interest rate growth so far? I mean the five increases last year. How do you assess their impact on the Czech economy?

When preparing the next forecast, which will underpin the May monetary policy meeting, we will assess our past monetary policy, so we will have much more accurate data and information. I think that in principle the monetary policy reaction to the situation after the exit from the exchange rate commitment, and in the context of the rapid growth of the Czech economy last year and in the previous period, when growth was clearly above potential and we saw signs of overheating, in particular on the labour market and partly in prices of some assets, especially real estate, so the reaction to tighten monetary policy, or, as we say, to normalise it and return somewhere to a more normal level of interest rates, was correct.

I think that this is being confirmed, basically, by the fact that inflation is close to the target, or currently slightly above it. There will certainly be a debate about whether the increase should perhaps have been rather more intensive, but I think these are nuances. It isn’t that important whether there was 0.25 percentage point more or less. The essential thing is that we have shifted from zero to a level near 2%. I think the correctness of this monetary policy is evidenced by the results of the Czech economy, where we managed to maintain, despite a certain activation, so to speak, of the economy by the previous monetary policy, which was effectively and efficiently carried out during the period of the exchange rate commitment and low interest rates, including the to some extent, but not significantly, expansionary fiscal policy starting in 2014 or 2015. I think this was the right thing, and in this respect monetary policy acted in the way it should, against excessive cyclical fluctuations.

As I said, there is still time for a more refined assessment. We’ll return to that. We certainly see no fundamental negatives stemming from the fact that we have moved monetary policy towards normal. There was an increase in interest rates, but from levels that were not normal and sustainable. There was no halt in lending. Credit provision continues at a normal pace, especially with regard to non-financial corporations. Households basically also still have good access to credit. This was also a correction of the situation where the credit expansion threatened to put financial stability at risk in some segments. So, along with macroprudential measures, monetary policy contributed to normalising and calming the situation.

An additional question on risks. Given the nature of the risks you mention as anti-inflationary, and the uncertainties mentioned, which are all processes that are unlikely to fade out any time soon, to what extent is it probable that there will be any room at all for tightening policy at the next meeting? Because these things will persist certainly longer than until May.

Well, we’ll see. They may not fade out, I agree with you on that, but we will be wiser, because the current story, for example, as regards the euro area and the German economy in particular is that following a temporary slowdown in the first – and probably also second – quarter of this year, growth will return to a normal level close to maybe as much as 2% year on year in Germany. So that’s an example of an anti-inflationary risk that may weaken substantially. We will also be wiser as regards Brexit. We will see with regard to global trade conditions, but I think the situation may be a fair bit clearer than today. And of course we will also see the new data from the domestic economy. We will see what course the koruna will take. We will see other data. The data for the first quarter may be particularly important, as they will show us whether the slightly unexpected declines in – as I said – consumption growth and wage growth, were a temporary swing and a statistical effect involving index bases, or whether they were a trend. The data for the first quarter should shed more light on that.

So, it is hard to tell now. I wouldn’t rule out either possibility. It may be the case that we will again gladly vote for interest rate stability. But it may also well be the case that a need to raise rates slightly will be confirmed. For the time being, it certainly doesn’t look like we’ll be considering cutting interest rates.