Transcript of the questions and answers from the press conference

Although the bank expects broad interest rate stability in the period ahead, you have commented in recent weeks that it would still be good if, after a pause, interest rate normalisation could continue, i.e. rates could rise further even though we are probably not far away from the steady-state level. Do these considerations still hold true after the meeting of the US Fed and after the European Central Bank changed the outlook for its monetary policy, or does it hold true that the pause could now be longer and we should give up thoughts of further interest rate normalisation for some time over the foreseeable horizon?

I think the logic of the comment you mentioned and the context in which it was made still applies. Nothing changed about that today. Of course we take into account our external environment. We are a small open economy, dependent to an exceptionally high degree on international markets and having high shares of exports and imports. Therefore, developments in the world, especially in the relevant countries, are naturally important to us. If any less favourable or negative scenarios in the expectations of our partner central banks were to materialise, it is clear that in the foreseeable future we could hardly shift closer to the neutral levels by increasing rates further. It wouldn’t be desirable, it wouldn’t be necessary, it wouldn’t make sense. We don’t increase rates according to our ideal preference in a model world. On the contrary, we always try to react to available data and to their detailed analysis including the use of our model system, but also to the overall context of the domestic and foreign developments.

So, it’s hard to say anything else than what you hinted at in your question. At this moment, of course, it looks like the pause could be relatively long, but I think that’s nothing new from our perspective. After the previous monetary policy meeting, during the presentation of the forecast and our decision, we stated that following the latest increase we expected broad stability for about a year, roughly until mid-2020, and nothing changed about that today. We will continue to closely monitor global developments. They are surrounded by many uncertainties. Neither we nor the key central banks in the world currently know much about to what extent some of these uncertainties will materialise and actually affect economic developments over the course of the business cycle. So, yes, the logic is as you have put it, but it certainly isn’t the case that we would conclude today that we rule out a rate increase next time, or in the foreseeable future. We certainly don’t. And this case applies in the event that the uncertainties prove largely unfounded and the trend turns positive again. Of course, we can’t rule out the negative scenarios either, which could also theoretically mean that we may cut rates next time. That can’t be ruled out either. So, I would say our position is now very open and very neutral as regards the future course of monetary policy after our future decisions. I must also add that next time we will have a new forecast including new data.

I want to ask whether you perceive any increased uncertainty due to the changes in the ECB leadership.

Changes in the ECB leadership are nothing unexpected. They are more or less a sure thing unless something completely unexpected happens, to which I attach no weight or probability. Changes at some positions have already taken place, and there will be changes at other positions, notably the President towards the end of the year. For us, this generates no uncertainty. The ECB is a standard, I would say predictable, institution governed by rules we all know, and I have no doubt that it will remain so regardless of who assumes that important position. In the end, the ECB’s decision-making mechanism is very sophisticated and complex, which reflects the fact that it is made up of nineteen central banks and sets policy for nineteen member countries.

So, for us, this is no immediate increase in uncertainty. It’s clear that, in any institution, when a change in leadership takes place, although the change is expected and planned, and even linked with a fixed-length mandate, this generates expectations as to how much the leadership style will change, how much the emphasis on various issues will shift. However, in view of the mechanism I described, I think that at the ECB this will always be the result of a broad compromise between the member central banks, between the euro area countries. From our perspective, this doesn’t change the perception or degree of predictability of the ECB as our key partner in the external environment.

Last week there were dovish comments from the European Central Bank and from the Fed. I would like to know your reflections on them, the CNB’s reflections on them, and whether these dovish views of monetary policy have already started to spread somehow within the central bank.

We closely monitor all the relevant communications of our crucial partners in the world of central banks and monetary policy. That’s nothing new.

We basically knew earlier that the ECB would probably postpone the start of what is technically called normalisation. I think the comments made at the international colloquium regularly held by the ECB in Sintra in late June were not all that surprising to us. Perhaps this is a matter of interpretation that is subsequently amplified or weakened by the market.

As regards the US Fed, I must admit that things are somewhat less clear to us, because at least I personally am not quite sure about the main reasons for the relatively visible signals of a future easing of monetary policy. I understand that there are some signals of a weakening of the US economy, but as far as I know, the Fed forecast hasn’t changed much so far in terms of growth, inflation or employment, which are the key targets the Fed has in its mandate. So, I must admit that I am slightly more uncertain as to what weight should be attached to this.

However, we don’t comment on the deliberations and decisions of our partner central banks. We can never know their situation as well as they do. But we take this into account and have to work with it somehow.

As to whether this is resonating within our bank, I think it isn’t so far. For us, this is one of the factors, I even mentioned it as one of the uncertainties arising from the external environment, even though the main uncertainties are in the area of trade policy. But, of course, we take into account monetary policy settings and they are relevant. However, we always primarily look at domestic data. So, I would say that in this respect there’s no fundamental change for us, but we need to factor it in.

One more question, a rather hypothetical one, regarding ECB monetary policy. How do you think the CNB’s considerations would be affected if euro area interest rates were to drop significantly, and what effect could that have on the koruna?

That is really an entirely hypothetical situation, as we don’t know whether the ECB will take such a decision. I am sure it will not be a clear and quick decision.

Again, we would simply have to factor it in. The interest rate differential would widen if such a step was taken at a time of stability in our rates at the current level. That would redefine our position. The question is how large that interest rate cut would be, as that plays an important role, and whether the rate cut would be the only new measure or whether it would be accompanied by additional forms of financial asset purchases under quantitative easing. That would also modify the situation.

As regards the koruna exchange rate, we have long stated that the koruna has fundamental reasons for gradual slight appreciation. The interest rate differential vis-à-vis the euro is among these reasons. However, we can see that in the short term – and the short term can also mean one year, perhaps sometimes even longer – the reasons of market sentiment may prevail over the fundamental ones. So, in the short term, the koruna might not be affected. If the wider interest rate differential were to persist for a long time, it would probably be a source, a stronger source, of potential medium-term appreciation of the koruna.