Transcript of the questions and answers from the press conference

Two questions. As usual, could you please summarise the debate? Above all, I’d be interested to know whether, by comparison with the previous two meetings, the arguments for increasing rates or leaving them unchanged were still more or less balanced, or whether they have shifted in either direction since last time, in your opinion. Second, I want to ask about the risk of lower rates than implied by the forecast. What is the explanation of this risk perceived by the bank? Is it something fundamental, or does it reflect a preference of the Bank Board to smooth the interest rate path, i.e. to avoid increasing and then decreasing back again? If the latter is the case, could you please explain the advantages of such smoothing, or the disadvantages of you flexibly reacting to the forecast and raising rates now and then lowering them.

I don’t know if I can give a complete enough answer, because the question as you asked it would require a longish seminar, and I don’t know whether I would succeed and in particular whether we have enough time. Nonetheless, the debate in my view was very similar to the previous two from my point of view, i.e. two preferences – or views of current economic developments – continued to be voiced.

The proponents of rate stability argued mainly in terms of the uncertainty regarding future developments in the real economy. There is a clear cooling abroad, and now a clearly confirmed cooling in Czech industry over the last few months. To some extent, there is a degree of uncertainty going forward. We have signals from the external environment that the uncertainty has decreased somewhat and some things have become a bit clearer. A typical example is Brexit, which now involves a smaller degree of uncertainty at least regarding the timing and the short term. But there are also other things – the USA and China and so on. On the other hand, there is perhaps a greater degree of uncertainty regarding domestic developments, especially in export-oriented sectors, as there are, for example, very mixed outlooks for the German economy. If you look at the dispersion of the forecasts for Germany, in terms of GDP growth next year they range between 0.2% and roughly 1%, give or take one or two tenths of a percentage point. So, it’s very difficult. And this is naturally also generating uncertainty for domestic industry in particular. So, this is the strongly preferred view of those who are saying “Let’s wait until this becomes clearer. Nothing dramatic will happen if we wait. The fact that we now have inflation somewhere at the upper boundary of the tolerance band, i.e. significantly above the target, is unpleasant, but we don’t see it as something that will have a strongly negative effect on the Czech economy. Nor do we see any signs of this causing inflation expectations to become unanchored from our target.”

The other side argues more from the monetary and inflation perspective, saying that inflation is above the target and our primary task is to deliver inflation close to the target “at any cost”, regardless of any redistribution effects, so decisive or clear steps should be taken using the instrument we have at our disposal, namely interest rates. And a slight rate increase cannot pose a fundamental risk to the real economy.

So, the debate is very subtle. It is about the accent placed on individual aspects of economic developments. The preference to wait and see and make no changes for now has prevailed for the time being. But I want to stress that the debate is clearly about whether to increase rates or leave them unchanged. No other alternative was even hinted at today. Rather, I would say that the perception is even shifting towards a hike, but we need a little more certainty that the hike will be a part of the policy normalisation trend we embarked upon in 2017 and above all 2018. Because a section of the Bank Board to some extent does indeed have a tendency to smooth the interest rate path. We don’t think it would be good with interest rates to introduce an additional element of uncertainty into the already difficult and unclear situation and signal to the real economy that we will increase rates a little now and cut them half a year later. We think that would also involve a negative aspect. We are not in an emergency situation and don’t have to do that.

Perhaps I should also mention one more circumstance, a generally valid one. Central banks – and we as the Czech central bank are a typical example – can handle very well situations where inflation is slightly higher than we would like to see it. In this direction, our arsenal is unlimited, in a way. If we felt that inflation expectations were actually becoming unanchored, we could make a very strong move. We could raise rates not by 25, but by, say, 50 basis points in a single step. That’s not a problem. It would be different if inflation were to start unpleasantly falling back to zero in a stagnation-recession situation sometime in the future. In such case, our instruments would be rather more limited, and more controversial to an extent. So, this instrument asymmetry may be playing a role in the considerations of some of us.

I probably haven’t given a complete answer, but I have tried to describe the discussion and the reasoning of the two groups in broad terms.

Could you please give us a more detailed estimate of when during next year interest rates could be changed?

Well, the details will be very brief. It could happen any time a monetary policy meeting takes place. The first one will be in early February, if I’m not mistaken. So a change in interest rates could take place then. As I suggested, if the trends prevailing so far in recent weeks and months are confirmed, i.e. an improving situation abroad over our monetary policy horizon, which is slightly more than a year, and if there are no additional strongly anti-inflationary trends in the domestic economy, I think the likelihood of an interest rate increase is tending to rise.

Could you please clarify in more detail your outlook for inflation next year, in particular whether and when inflation will exceed 3%?

I can’t give you the accurate figures, but they can be found to some extent in our most recently published forecast, which is essentially unchanged. In the months ahead, inflation will very probably be very close to the 3% boundary, i.e. the upper boundary of our tolerance band. It might temporarily exceed 3% in some months, as was the case most recently. This is perhaps quite likely around the end of Q1, for the purely statistical reason of a low base from last year. So, the base effect may be stronger and a short-lived increase to over 3% may be more likely at that time.

Generally speaking, we will be close to 3% in the first few months of next year. After that, the expected decline in inflation should manifest itself more strongly, linked with a weakening of domestic inflation pressures such as wages and household consumption, appreciation of the exchange rate, which should counter the inflation pressures, and slight disinflation from abroad, because for now we do not expect any price pressures from abroad either, even though we have slightly increased our estimate of oil price growth, but that is offset by expected depreciation of the dollar against the euro. So, roughly as I said.

Could you please reconcile for me the fact that the Bank Board, on the one hand, sees a risk of interest rates being lower than assumed by the forecast in the coming quarters, and the fact that if the current trends are confirmed, you perceive a shift in the views of the Bank Board members towards a possible increase in the quarters ahead. Is my interpretation correct that interest rates are now already lower than assumed by the forecast, so the risk has actually materialised partly, but a tightening may take place? In the longer term, where the forecast assumes a decline, do you also see rates lower than forecasted? Or is the outlook not necessarily valid for that time horizon? And is the risk meant more for the nearest period of Q1 and Q2?

It is as you described it, i.e. in terms of real rates we are already below what the forecast assumed, both for our key policy rate and for market rates. At the same time, going forward we expect this “risk” of non-fulfilment of the forecast to pertain more or less to this quarter and the next. In the more distant future, most of us think that the scenario of a decline in rates will not materialise either, as the forecast has assumed so far, and that rates will remain stable or could even go up slightly. So, we have a slightly different view of the rate curve, without that hump, but rather with a smoothing of the curve. And it remains an open question how flat or steep the curve will be in the future. That is slightly beyond the horizon of our current ability to see that accurately.