Transcript of the questions and answers from the press conference
I would like to ask you for your assessment of the probability of whether the next change in Czech interest rates could be up or down. At the previous meeting, you said you saw the probability as being balanced. And perhaps I could also ask for an explanation of the new forecast, which implies first a rise in rates and later a decrease – would you prefer to mirror the forecast or to smooth out these small movements in your rate setting? On a related note, the financial market currently expects one decrease in Czech rates possibly still this year and up to two decreases in the next twelve months. Could you please explain why you and your analysts see the situation differently than the financial market, in your opinion?
Although the outcome was as expected and all the Bank Board members supported the proposed decision in the final vote, today’s debate was relatively lively. The debate covered the question of to what extent we are clearly convinced about what the forecast says about positive developments in terms of economic growth in the Czech Republic and the maintenance or consolidation of the other balances, and on the other hand what weight should be attached to the anti-inflationary tendencies affecting us indirectly from abroad. In the end, the conclusion of the debate was that we currently see no need to increase rates, which the forecast might in a way partly prompt us to do. It reacts, of course, to the past developments in Czech fundamentals – Czech indicators. It also incorporates what I mentioned, i.e. the expected changes in tax rates on some items that will take place at the start of next year assuming the legislative process follows the usual course. We also calculate the second-round effects, which will mean, if our assumptions materialise, that the slowdown in inflation expected by the forecast and its return roughly to our target, i.e. close to 2%, will be somewhat slower on account of some additional effects related to the indirect tax increases – second-round effects rather than direct ones.
In the end the view prevailed that it is not necessary to react in an overly activist manner to these small fluctuations over time, i.e. the forecast indicating first a small increase in rates and then a declining tendency. So, the Bank Board eventually opted for the tactic of smoothing out the interest rate curve, because we came to the conclusion that the potential risks of a slight overshooting of the target are still relatively small. We are still inside the tolerance band, which poses no problem to us. There is no significant increase in inflation expectations in the economy among either corporations or households. On the other hand, we eventually attached a greater weight to the risk of an economic slowdown abroad.
Overall, the future course will very probably be as we said after our previous meetings, i.e. rate stability in the quarters ahead. We do not see the probability of cutting rates as very strong either. We did not discuss it in any greater depth, but I would say we currently see no fundamental reasons for doing so from the perspective of the Czech economy. There is a scenario which you will see after the publication of the forecast, a sensitivity scenario working with the hypothetical variant of euro area growth falling by roughly one-half compared with today’s baseline scenario. That would, of course, put much stronger pressure on us to consider cutting rates. But that’s a hypothetical sensitivity scenario, and our baseline currently assumes no such thing. On the contrary, as you noticed, we assume a slight recovery in economic growth next year and the year after.
I would like to ask for clarification. At the previous meeting, you said you saw the probabilities of a hike and a cut as being roughly equal. Now you presented arguments for a hike, which you refrained from doing in the end in order to smooth the curve, and then you started talking about a possible cut. Could you please clarify which of these tendencies is likely to prevail going forward? In other words, is the next move – even a distant one – more likely to be up or down?
I think nothing changed today about what we stated last time and what I presented here. The probability of the two directions is still balanced.
The most recent forecast was drawn up using a new model. How long did it take to create the model, and will you continue to publish the projections of the older model in the quarters ahead so that the public can assess how the models differ?
I’m not sure if I know all the details. The new model certainly took one or perhaps two years to create. It is not a half-baked thing. It was gradually prepared, fine-tuned and tested. We used it in the previous forecast as an unofficial test source of information and context. We will certainly continue to present the results according to the old model, and we will at least continue to assess for several quarters how close we were to the target according to the old model until we have moved far enough ahead in time, so that the results we back test are always from the same model. For example, we were still using the g3 model in early 2019, so we will still do the assessment of how close we were to the target according to g3 in a year or year and a half. We will switch to the new model gradually so that the assessments are always comparable.
So, as a part of our standard transparency, we will certainly publish the available information. My colleagues can perhaps give you more details…
Luboš Komárek, Deputy Executive Director of the CNB Monetary Department:
As the Governor said, we will continue to internally test the old model, show the results and assess the fulfilment of the inflation target. We always look at the forecasts between one year and one year and a half back, choosing the one in the middle of the horizon of most effective transmission and looking at how the forecast materialised in reality. As regards the switch, however, the main model will be g3+, which is now the basis for the baseline scenario and other parameters of new forecasts.