Transcript of the questions and answers from the press conference
I would first like to ask about something technical: the implication of the forecast for growth in market rates this quarter and the next. If the central bank were to follow the forecast mechanistically, which we know it doesn’t have to do and currently isn’t doing, could you please clarify whether this would really imply one increase in this quarter and another increase in the first quarter of next year? I just want to ask for clarification.
And then in general, could you please sum up today’s debate? What arguments were used for and against raising rates? Perhaps this was linked with why today’s decision was postponed by half an hour. Could you please tell us a little about that?
Above all, could you please compare the today’s debate with the one on 25 September, which you described at the time as very balanced between raising rates and keeping them unchanged? Do you feel from the debate today that the balance of opinions and arguments has shifted in either direction?
My last question concerns the forecast and the new model you’ve been using for several months now. Is the deviation of your monetary policy decisions from the forecast, which has lasted for several months now, related in any way to the new model? Is there anything in the model that you perhaps feel the model doesn’t reflect accurately? And what are the arguments for not sticking strictly to the forecast, as traditionally used to be the case at the CNB?
Thank you for your questions. I hope I caught all of them. Please remind me if I omit anything.
Yes, the forecast implies two increases of 25 basis points, the smallest possible step, or rather the smallest step usually applied. That means one increase now, in this quarter, and one increase next quarter.
The debate today was again in principle about whether to keep rates unchanged or to increase them, i.e. there were no other alternatives. Like last time, it was very balanced or, I’d say, rich in arguments on both sides. This also led to us not being able to complete the debate in the time we had allocated. We’d also had a relatively long “open meeting” with the Monetary Department and other experts in the morning. So, that caused the slight shift in time.
As for the arguments, the proponents of raising rates argued along similar lines as last time. Basically, we are constantly above our inflation target. The forecast implies a rate increase and indicates that if that increase doesn’t take place, we will very likely be very close to the boundary of the tolerance band, or there is a likelihood that in some months, in particular in the first quarter of next year, we might exceed the 3% headline inflation level. Of course, another argument for raising rates was that if we do not follow the recommendations of the forecast for a longer time, there is a danger of a longer-lasting period above the target, i.e. of not hitting the point target of 2%, and a concern of inflation expectations becoming unanchored, or becoming anchored at a higher level than consistent with the target. As a new thing, perhaps, there were arguments that moderately reassuring news is now arriving from abroad with regard to some of the uncertainties and risks we have been talking about constantly over the last few years, namely Brexit, trade wars and geopolitical tensions linked with trade relations. An alleviation, or an easing, has occurred in these areas. The slowdown that has been visible in data from the relevant part of Europe, i.e. the effective euro area, for some time now, should also bottom out around the turn of the year and in the first half of next year. A modest recovery should then begin. This is signalled by various forecasts made, for example, by German institutions, which are saying that this is no deep recession, it is a cyclical downturn, partly a structural one, connected, for example, with changes in the car industry, but it will not be a deep recession and the figures should improve next year. So, all those were the arguments on the side of the proponents of a slight increase in rates.
On the side of the opponents of raising rates, i.e. those who voted for rate stability, the argument was made that the cooling in Western Europe, and in German industry in particular, is already very strongly visible in our industrial sector. We have a number of signals from industrial corporations of a significant reduction in orders. Some firms are even already temporarily reducing their production capacity. Some are signalling that they might have to resort to such a step. So, this group feels that the cooling alone will have an anti-inflationary effect in the economy and that the strong domestic inflation pressures perhaps may not be as strong as they seem in the forecast, that there is no need to worry about inflation expectations escalating and becoming unanchored, and that from this perspective it is better to keep rates stable and wait for future developments. There were also technical arguments. For instance, if there is – according to the forecast – a relatively higher likelihood of the tolerance band being reached or exceeded sometime at the start of next year or in the first quarter, then we are no longer able to affect that with today’s decision anyway, because the monetary policy horizon is at least one year, perhaps longer. So, that was roughly it. At the same time, those who argued for rate stability argued as usual that developments abroad didn’t seem much less risky than before. We have recorded some minor signals, but for example the cyclical downturn or slowdown typical of the industrial sector, especially in Germany, which is crucial for us and which we are exposed to the most as an open industrial economy, is combined with structural changes, as I already mentioned, for example in the car industry, but also in the energy sector. So this combination may have an effect for longer than indicated by the current – maybe over-optimistic according to our interpretation – expectations that the cooling will be short-lived and a visible recovery will start in the relevant part of the euro area already in the second half of next year and will gradually also foster a recovery in our economy.
So, these were roughly the arguments used on the two sides. I am sure I’ve forgotten something, but you’ll learn many other details from our additional documents.
With regard to the model, I think the fact that we haven’t followed the recommendations of the model I think twice recently, isn’t related to the quality of the model. I think the model is working well, that there are even marked qualitative shifts, for example in the part of the model concerning the external environment. I think there’s no doubt about that. This is a specific circumstance of the very dilemmatic situation we are now experiencing around the world and at home. We have a dual economy to some extent. The industrial sector, which is exposed much more quickly to global effects, works differently to, for example, sectors more closely connected with domestic developments, which of course react with a lag, i.e. sectors – primarily in the area of services – to which domestic inflation is closely linked. So, that somewhat contradictory situation means that the Bank Board must carefully consider the subtle differences between following or not following the recommendation of the forecast. But I don’t think this is connected with the change and upgrade of the model. On the contrary, perhaps, the model is now better than the less detailed one we were using before would have been, and maybe we would be facing an even bigger dilemma.
Did you also discuss how this could raise inflation next year if you decide not to follow the recommendation of the forecast? Can you tell us how the path could look if you do not raise rates now or in the first quarter?
We don’t know this exactly, of course. We are talking here about an uncertain future. Our colleagues prepared sensitivity scenarios for us – variants where we work hypothetically with both possibilities. So, we can obtain an estimate from this. In principle, the difference for inflation in the short run – because, after all, we generally work with quite a short horizon – is minimal, whether we raise rates or not. It’s more a case of a greater or lesser certainty. In principle, however, we are talking about one-tenth or two-tenths in the CPI index. So, when you add to that the fact that this simultaneously accumulates with changes to indirect taxes in the same period and monetary policy inflation will thus be rather different from measured headline inflation, which we target but cannot fully affect at times of changes to indirect taxes – that’s why we also have monetary policy inflation – the uncertainty is rather great. Overall, in macroeconomic terms, however, the likely difference in the two scenarios is very small in terms of the inflation index. I don’t have the figures in my head, but I dare estimate it at around one-tenth or two-tenths. Something of that order.
How do you look at future meetings? Do you think that the debate on whether or not to raise rates will continue at the next meetings? Or do you expect that, as the window for raising rates implied by the forecast shortens and the middle of next year approaches, the arguments or the space for a rate hike will disappear and the debate will be different?
The debate is different every time, as you cannot step twice into the same river. In principle, however, the situation remains the same. I would wish for the more optimistic expectations to materialise, that is, for the current uncertainties, especially those abroad, to ease more so that the pessimistic variants of the scenarios do not then ensue; for it to become clear that the current slowdown – being experienced especially by the German economy, for example, which we follow with a lag – is temporary; for us to return to a path of longer-term sustainable steady-state growth; for us also to have a clearer picture showing that the dilemma has eased and there is no problem in continuing on a path to normal interest rates and we will be able to move rates one or two notches further without worrying about this being premature and about having to take it back shortly afterwards. I would wish for this to happen. However, it’s just a wish. The question is how things will pan out. We’ll see. I wouldn’t dare to estimate it now. We are constantly getting new information and we will of course be guided by it.
In the past, the Bank Board also gave as an argument a preference for smoothing the interest rate curve. Does this mean that if it does not make the implied rate hike now, it should not then symmetrically cut rates from the middle of next year so that the curve stays relatively level?
Yes, we discussed this. It is an eternal issue for central bankers. In my personal opinion – I am not speaking on behalf of the Bank Board now – I understand and sympathise with this approach, because I understand that, technically speaking, we should be more flexible and move rates more when there is reason to do so according to the relevant model and technical apparatus. However, smoothing is also an appropriate part of economic and policy decision-making. So yes, I can imagine a situation where we will be recommended to cut rates but we will simply not do so immediately upon the first recommendation. Yes, it can also work in such a symmetrical way.