Transcript of the questions and answers from the press conference
A question about movements of the koruna exchange rate. How large a movement would you consider to be excessive or inappropriate? And are we talking about a degree of volatility over a certain period, or about reaching or exceeding certain exchange rate levels?
At the moment, we have neither specified any such threshold, nor discussed it in detail, so I won't talk about it either. Of course, we must always consider it in the context of other things, i.e. how the overall economic situation, foreign markets and certain other parameters are developing. I don't want to specify any such threshold now, but there is certainly a sensitivity threshold, or pain threshold, at which we would consider a reaction and possibly launch it. I'm sorry, I won't speculate in this direction now, but as you all know, we have a sufficient toolkit to take action, especially as regards the size of our international reserves.
You are lowering rates at a moment when the koruna is weakening sharply. At the same time, there will clearly be an economic downturn. Does this mean we should prepare for a situation - or is the CNB prepared for it - where we will, for a time, experience a scenario of an economic downturn, lower rates and a weaker koruna, and therefore that you will tolerate higher inflation than you would under normal circumstances, i.e. that for a time you will not necessarily insist on fulfilment of the inflation target 12-18 months ahead?
At the moment, of course, we have no comprehensive forecast on the basis of which we could seriously talk about the future, because that simply is not physically and technically possible. However, it's clear there will be a sharp downturn in the economy. It's very difficult to tell today whether the economy will, over the next 12-18 months, fall only to zero growth or even into negative territory, but each day the extraordinary situation lasts increases the likelihood of a worse scenario. We implicitly anticipate that in our decision, and we want to take it on board.
In addition to a halt in growth and a turnaround into negative territory, we currently expect a subsequent dramatic decline in inflation. In the next few months, prices will probably continue to record swift growth, due to past developments and statistical effects, probably above the upper boundary of our tolerance band. However, a relatively sharp turnaround in inflation to the downside can also be expected thereafter, say within a few months. This means sizeable disinflation. We expected disinflation in our latest forecast as well, but much more gradual than we can imagine today. This will be caused by the shock the economy is experiencing on both sides, demand as well as supply, coupled with a strong supply shock consisting in a drop in prices of oil and subsequently maybe other energy commodities, too.
So, our decision goes in a certain direction and we are very sure it's the right direction. As I said, we will hold a regular monetary policy meeting in less than ten days, and by then we'll have a preliminary scenario - I assume several scenarios differing in the intensity of the crisis situation, more or less - where we will probably see whether our reaction needs to be stepped up.
But as you correctly pointed out, the exchange rate is moving in the same direction as we are, currently easing conditions very significantly, especially for the export part of the economy. However, as we are going through an extraordinary time, the exchange rate alone cannot be enough to deliver the appropriate monetary policy parameters. There is a large segment of the economy that is more on the import side, so that is going in the opposite direction. Additionally, there are dysfunctions in external demand in the physical sense, i.e. logistics, various problems on the side of customers. So, it won't help anyone very much that conditions have improved dramatically thanks to the exchange rate if they can't transport goods to their destination, or maybe can't even complete them because they lack supplies from foreign sub-contractors.
So, this is about trying to take a comprehensive view of the economy and our ability to pave the way for future measures. We are not concealing the fact that our meeting and decision today are, of course, of a signalling or symbolic nature to some extent. We will go in this direction because the situation clearly calls for it. However, it remains to be clarified gradually how far we will go.
(The Governor's comments will be complemented by those of Petr Král.)
The combination of shocks which the Governor spoke about and which is affecting our economy is indeed non-trivial. It is a concurrence of shocks to external demand and domestic demand, to domestic and external supply at the same time, combined with an exchange rate shock and a shock to oil prices. The response of the economy will be very negative in the short run, and the depth and duration of the negative response will depend greatly not only on how the virus itself spreads, but also on how long the measures to stop it spreading further - we can now call them global, or pan-European - remain in place. So, it is certainly negative news for the real economy in the short run, but it is not the economic end of the world. It is still something our economy can withstand relatively well, as it has large buffers from the good times we have experienced over the last few years. A reasonable combination of fiscal, monetary and other policies can guide the economy through this period with relatively small losses.