Transcript of the questions and answers from the press conference

Could you give us some more details about the debate today? Specifically, the two gentlemen who voted for increasing rates – what were their arguments, what changed their view of the situation compared with the previous meetings at which they, too, voted for keeping rates unchanged and for smoothing the path as you mentioned last time? And, of course, what were the counter-arguments which eventually led you to keep rates unchanged? And could you possibly give us a hint of what this debate might mean for the future?

The debate was driven by the fact that the assessment of the current situation compared with the previous meeting shows that the risks are deepening more in the inflationary than the anti-inflationary direction. That is our current assessment for now. To sum up, the Czech economy is maintaining its solid dynamics. The dynamics are more or less in line with the forecast as we expected in August. So, we’re still at growth rates of 2.6% or 2.7%. However, prices are rising rather faster than we expected, and the exchange rate is weaker than we expected. The biggest deviation is for the exchange rate, and of course a weaker exchange rate means easier monetary conditions, in a situation where domestic inflation pressures are not fading. On the contrary, the context of the labour market and wage growth suggests that they are very robust. At the same time, we are not yet seeing any visible signals of a cooling of the Czech economy. So, based on these considerations and the relevant model calculations, the proposal to increase rates once by the minimum amount of 25 basis points appeared justified. In fact, the forecast has been assuming one interest rate increase since August, perhaps even earlier in a different context. So, the proposal is logical from this point of view.

On the other hand, of course, there are counter-arguments that while all this holds true, the situation around us is extremely uncertain. Sooner or later, the slowdown in growth – or even complete halt in growth or minor contraction – in our key partner economies in the euro area will manifest itself in the Czech economy. That means the German economy primarily, but we can also see a slackening in other economies. We can see a substantial slowdown in economic growth in, for example, Slovakia and in the estimates of Slovak institutions. This is the part of the argumentation which says we should wait and there is no acute problem in us having temporarily slightly higher inflation pressures and being above the target, in the upper half of the tolerance band, because it would perhaps be slightly precipitous to increase rates now and follow that with a rate change in the opposite direction a relatively short time later. So the argument is about smoothing the curve, about stability, and about what we should put a greater emphasis on. Of course, our mandate is primarily price stability – we cannot ignore that – and the rest is about weighing the options rather precisely as to what represents the bigger risk at a specific point in time. As for whether we fear the anchoring of inflation expectations becoming disrupted – so far the opinion has been voiced clearly that we are not facing this danger and that in the environment we’re in – although we are quite the exception in it now, according to the data – we are still fighting non-inflation rather than inflation. So, the concern that a less controlled price trend might start was smaller than the concern of the economic weakening around us.

To summarise things simply, these two poles were present. The debate was not easy. The ratio of five to two partly expresses that and confirms what we communicated, or what my colleagues communicated, that it certainly wasn’t a debate about lowering rates. It was a very even debate as to whether to increase them slightly or keep them unchanged.

At the beginning, you said that this debate took place today and that you would probably return to it at the next meeting. I want to ask if the majority of five members who voted for rate stability today mentioned in the debate what they would need to see to shift their decision to a hike next time. Were there any arguments in this direction?

Yes, but I may not be very specific now, because I may not remember all of them. Of course, there was some uncertainty regarding to what extent the decision not to raise rates today means a risk of non-fulfilment of our mandate at the monetary policy horizon. Whether our decision not to raise rates today as the model suggested – and it had suggested the same move last time, we basically didn’t listen to it last time either – whether a further decision of this kind… how the risk could be quantified that at the monetary policy horizon this might manifest itself in sustained non-fulfilment of our target. I think for those members who were less resolved to change anything, this was perhaps what deterred them the most. They wanted to see with more certainty how things would pan out based on new data. After all, we are currently still working with the August forecast – updated in a way, of course, to take on board recent data obtained in the meantime. But a lot has happened in the meantime. Things are changing on a daily basis. So, that was probably the strongest concern with regard to raising rates now.

Despite that, is a rate cut at play in the shorter term, let’s say next year? And under what circumstances could you imagine that?

We aren’t in a situation to announce things a long time ahead. Given the macroeconomic developments in terms of both economic growth and the very tight labour market, with a very low unemployment rate, labour shortages and hundreds of thousands of unfilled vacancies, with inflation well above the target for some time now, and in a situation where the exchange rate is below our expectations, i.e. the exchange rate itself is easing monetary policy conditions without us cutting rates, I see no reason for this direction of interest rate movement in the foreseeable future. However, “never say never” applies in our line of work. Of course, I don’t know what will happen. All those risks that, as we’ve stated, are growing in terms of their potential impact – Brexit, trade wars and other political instabilities – may coincide. Something may also occur on global commodity markets and so on. So, that can never be ruled out. But as long as these risks and uncertainties are not fully materialising – and they’re definitely not – I think that, as I’ve announced, we’ll probably discuss again whether to leave rates unchanged or to raise them at the next monetary policy meetings. But as I said, our outlook is a short-term one. Our outlook is about one year ahead. That’s what we can predict at least vaguely reliably. We’ll see what happens next.

How do you explain such a contrast between the performance of the Czech and German economies?

I explain the contrast quite simply. Look, we have very close links with the German economy, and those links have not disappeared and will not do so easily. In our country, several circumstances have come together which – especially this year – are exceptionally favourable and are dampening the incipient slackening of external demand linked mainly with the German slowdown. So, yes, industry does have rather fewer orders and is not as overheated as it was until recently. Orders from Germany may also be falling. This means that many firms’ supply of unrealised orders is falling, but their actual production is not, because they have been unable to meet many of those orders for various reasons, mainly labour shortages and some others.

Another thing is that employment has risen to historical highs over the last five years, and wages are growing at an extraordinarily fast pace for the fourth or fifth year now. To sum up, the wage bill is rising at an unprecedented pace. This, of course, has to be reflected – especially after a time, and the peak has come this year – in dramatic growth in domestic consumption. Domestic consumption is able for a time to offset the decline in the performance of the industrial part of the economy. Meanwhile, the structure of the Czech economy is also changing gradually. The weight of industry is slowly decreasing. Services – be they market or non-market ones – are gaining in importance. Construction is doing relatively well. This is mainly related to public contracts and the housing situation and a boom in apartment construction. In terms of macro-figures, we are experiencing moderate fiscal expansion this year. The fiscal impulse accounts for about 0.4% of GDP, if I’m not mistaken. There has been a coincidence of spending stimuli such as pension growth, high wage growth, solid growth in public investment and other things linked, for example, with the EU funding cycle. Taken together, these factors are able for the time being to offset the previously very high and slowly falling demand from abroad, especially from the German economy. That said, in my view – and it’s my personal impression – our links with the German economy and the alignment of the cycles have not been and will not be disrupted. This will occur with a lag – when we’ll feel the German slowdown in the Czech economy.

The possibility of selling part of the yields on the CNB’s foreign exchange reserves was mentioned in the Bank Board members’ recent comments. Did the Bank Board discuss this issue at today’s meeting?

It didn’t. It wasn’t part of the discussion. We’ll hold meetings on this with experts and will gradually think this over. It’s not an urgent matter. The monetary situation is not forcing us to do this in any way. So, no, it didn’t.