Transcript of the questions and answers from the press conference

I know this is a very basic question, I just want to make sure that we’ve got this right. The forecast implies an initial rise and then stability. The rise happened today. Does this mean that after this rise, the forecast implies stability going forward? I just want to make sure.

An additional question: in the previous forecast, you indicated zero to one interest rate increase, but in comments made by Bank Board members, including yourself, you indicated zero to two rate increases this year. In view of the new information we have and the one increase that has already happened, I would like to ask if you could specify whether the original guidance of zero to two increases has been narrowed or clarified in any way.

That’s right, you’ve understood it correctly. The rise anticipated by the forecast happened today.

As regards future developments, I would say they remain open. At this moment, the forecast doesn’t see a need to further increase rates in the upcoming year or so. However, we always regularly update our forecast and prepare new forecasts. As we live in an environment that is very variable and in which different uncertainties and risks come to the fore to a greater or lesser degree as time goes on, no movement can be ruled out. This means, on the one hand, a further increase if necessary and if it turns out that domestic inflation pressures are not diminishing and are possibly being joined by other inflationary factors from abroad. But likewise I can hypothetically imagine a move in the opposite direction if the situation were to change dramatically in the anti-inflationary direction. However, neither of these is the main scenario. The main scenario is what the forecast says – an increase today and broad stability going forward.

A question regarding the votes cast. At the previous meetings, only two members were in favour of raising rates, but today the vote was unanimous in the opposite direction. Could you please explain the main arguments that led the complete Bank Board to vote this way today.

Probably slightly different reasons for each member. Everyone’s arguments were similar, of course. They are determined by the information from the new forecast. Nevertheless, everyone probably sees a slightly different accent. I would say that this is not such a dramatic change. At the previous meetings, at least the two most recent ones, even the majority that ultimately voted at the time for keeping rates unchanged said, “Yes, we see arguments on both sides, but with a slight majority, say, 60:40 or 55:45, we see stronger arguments for a wait-and-see approach”. Today this was reversed. I would probably emphasise above all a slight easing of the uncertainties and risks in the external environment. Brexit has been postponed. It turns out that the slowdown mainly of the European economy, which affects us the most, was not as strong and could possibly last for a shorter time than foreseen by the more pessimistic predictions. The global trade situation seems to be calming somewhat with the China-US talks. Domestic inflation is firmly anchored. We are at the upper boundary of the tolerance band. We evidently have no need to fear what may have subconsciously limited us slightly in the past, namely that we might see a rapid strengthening of the koruna. We can see that this “direction” is not such a risk and that the sentiment vis-à-vis currencies like ours is more on the negative side. So, all these things have shifted slightly in a more inflationary direction, and that has shifted the weight from, say, 60:40 against a hike to roughly the opposite.

So, it looks dramatic that from a 5:2 vote we have suddenly moved to 7:0 in favour of the previous minority of 2, but it’s really an evolutionary change determined by the shifts in our new knowledge of the situation and its new outlook. It’s not all that dramatic a change.

Could you please tell us to what degree you discussed at the meeting, or reflected in the decision, the alternative scenario, about which we’ll probably learn some details tomorrow, which is based on the new model that you’ll probably start using in the second half of this year. If so, could you please at least hint in which direction the new model differs from the current one on which this new forecast is based, especially with regard to the exchange rate and interest rates, and how this influenced you, if at all?

Yes, as an alternative scenario we had an output from the new g3+ model in its semi-operational phase – it is not yet fully operational. I would like to stress that the scenario doesn’t differ too much from the baseline scenario in the key parameters. In particular, as regards economic growth, and in fact even inflation, it doesn’t differ much, hardly at all. It’s rather more sensitive because it uses a finer breakdown in the area of external data, especially in the area of the foreign industrial producer price index. The new scenario can now break down this index into a fundamental component and a component due to energy commodities. There is a finer structure of household consumption. So far, it is signalling a higher degree of resistance to exchange rate appreciation than the standard scenario of the current g3 model.

So, I would say that the new scenario has brought us no fundamentally different knowledge and view of the economy and its current story. However, to some extent it has confirmed our belief that one slight interest rate hike is right at this moment and is consistent with our reading of the economy now, and the risk of a mistake is relatively small. This is roughly how I view the conclusion from the use of the new scenario – as a supplementary argument.

I have a question about the expected exchange rate of the koruna. To what extent will it be relevant for monetary policy in a situation where the performance of the Czech economy is clearly slowing?

The exchange rate of the koruna is a relevant piece of information for us, of course. Together with interest rates, the exchange rate forms the monetary policy conditions, which are a key parameter of the monetary policy stance for us. So it will of course be relevant. As I said in the statement, in the new forecast we expect it to appreciate slightly, substantially more modestly than in the previous forecasts. I would probably leave it at that.

In any case, it holds true that we don’t target the koruna exchange rate. For us, it’s an important but somewhat secondary indicator of the economy and the monetary policy stance. I don’t expect any dramatic developments. I have no reason not to believe the forecast we discussed today. I think conditions are in place for slight appreciation of the exchange rate.

As for the slowdown of the Czech economy, the slowdown is moderate. We lowered the forecast today, but we still believe in growth of the Czech economy close to its potential – 2.5% this year and slightly higher next year. So there is a slowdown, but given the slowdown in Western Europe, i.e. in the euro area, the positive differential for convergence will remain more or less unchanged. So, this shouldn’t be a reason for the exchange rate not to appreciate according to our expectations. Of course, there may be other reasons which we may not have factored in sufficiently at this moment, but time will tell.

Could you please give us a broader insight into how actually we have moved from zero interest rates to a level this high relative to the environment we’re in. I think we have perhaps the highest interest rate differential against the euro area this country has ever had in recent history. We can see that almost all other central banks are tending to become more dovish and are retreating from early tightening of the monetary conditions. Could you please give us your thoughts on how the Czech economy differs from these other countries, including, for example, Poland and Hungary, which also have strong inflation pressures. How do you explain that the Czech National Bank could increase interest rates relative to the euro area in this relatively aggressive way without being punished by a sharp appreciation of the koruna?

Well, I fear that would be a two-hour lecture and I don’t want to disrupt the standard regime of this press conference.

It looks striking, of course, but in fact it isn’t all that dramatic. Today our interest rates rose to 2% in nominal terms. Taking into account that we have inflation above 2%, this year maybe about 2.5% on average, we will still have negative real interest rates, at least in terms of our key rates. That’s one remark.

The other remark is that I don’t know if the inflation pressures are the same in all the comparable countries. In Poland, they have long been clearly somewhat lower. Poland therefore doesn’t have to react, because they are well below their inflation target, which, by the way, is higher than ours – theirs is 2.5%. They are not even close to it. So, it’s quite understandable that they are keeping rates more or less at the previous level. In my opinion, Hungary is a completely different case. It conducts a rather experimental monetary policy, but I don’t want to comment much more deeply on that. I think it’s hard to compare. As for other countries, it’s true that our cycle perhaps rather resembles that of the USA or Canada, and maybe other overseas countries where rates are also at non-zero levels and close to what we have now, because our rates are now somewhere between Canada and the USA. We are comparatively closer to a normal level, and I regard that as basically right.

We are simply reflecting domestic economic developments. We have the lowest unemployment rate in Europe and probably one of the lowest in the world. We have chronic labour shortages, which are due, in short, to, one, demographics, a long-term factor, and, two, the structure and development of the Czech economy as a highly industrial country with relatively strong growth, which is generating labour shortages and, in turn, sharp wage growth. This wage growth is not only catching up on the lag from the past, which we have probably now overcome, but today it is due to labour shortages. Amid rising employment, which is at record highs by the way, this is generating significant inflation pressures. We can see that in price growth, especially for those prices that are generated at home, namely prices of non-tradables. They are truly a good measure from this point of view. As we know, this segment of inflation is rising much faster relative to our inflation target.

The exchange rate is not appreciating for two basic reasons. There is a general risk aversion on the international forex market, so our interest rate differential isn’t attractive enough for any excessive investment in the koruna. And, of course, the overboughtness of the koruna market is still playing a role. It occurred as a consequence of the expansionary phase of our monetary policy and, as its natural result, it is now dampening the appreciation. Therefore, we have room to return our rates to a more or less normal level. At the same time, we know that this level of rates isn’t one that should harm the reasonable development of the Czech economy in the near future.

So, this is roughly the picture that has fostered this in our case. We are something of an exception in that, unlike other countries, including the euro area, we are suffering from no other strong imbalances, which elsewhere often cause monetary policy to very carefully consider such circumstances. To some extent we have this luxury. So much for that, in a very brief way.