Transcript of the questions and answers from the press conference
There is frequent speculation that a second wave of the epidemic might emerge. Did you take that into account in your estimate? If a second wave were to arrive, how do you expect you would react?
As I said, today we discussed the “small” situation report. This means we didn’t have a new forecast, only a minor update. We had the May forecast, which was complemented slightly with data that had arrived in the meantime. As you know, the May forecast contains two main possible scenarios. The one we are talking about here is the baseline scenario, that is, the scenario of a decline in GDP of around 8% in 2020. This scenario basically assumes a favourable course of the epidemiological situation, which is fortunately materialising so far.
Of course, there’s also the crisis scenario assuming possible complications as regards the reopening of the economy and the gradual return of life to normal. As you know, the macroeconomic parameters of this scenario were much more dramatic, with a contraction in GDP of somewhere around 12%, higher unemployment, probably a faster decrease in inflation, but only with a lag, and so on.
So, today we didn’t make any progress, so to speak, with any special discussion of the crisis scenario. It wasn’t necessary. As I said, the situation is materialising more or less in line with our baseline scenario, so it wasn’t necessary to react with anything new. In the future, however, we are ready to react to changes in the situation. At the moment, nobody knows what it will be like. That’s why I have stressed several times, and it was also mentioned in the statement, that we are in a time of huge uncertainty – uncertainty with regard to the current situation of the economy as of today, now, because statistical data arrive with a delay, but also uncertainty caused by a number of risks – health risks – which have not been resolved definitively at home or abroad, as well as other ensuing consequences with regard to how economies, countries, or groups of countries will react to the situation. All that puts together the picture of the future course of our economy, and we will proceed accordingly. At the moment, no reaction as regards our instruments, namely the monetary policy instruments we primarily discussed today, was needed. We did react in the macroprudential area, the financial stability area, last week, when, as you know, we discussed these issues and adopted and announced some measures.
Although no further monetary easing is needed now according to the vote today, and the outlook is also such that there is probably nothing pressuring you to take any such step in the near future, several Bank Board members, including yourself, have commented on potential additional instruments since the last Bank Board meeting, saying that the Bank Board would discuss such instruments and the possibility of using them at least hypothetically. I would like to ask whether you made any progress with that today. In view of your statement at the conference in Warsaw last week, where you said that a further decrease in interest rates, or a shift into negative territory, would be undesirable in terms of the profitability of the financial sector, does that mean we should view this potential instrument as less likely than some of the others on offer?
Of course, we are considering what could potentially happen and how the situation might unfold. We are in a truly exceptional situation of a large downturn in the economy caused by a specific shock. The reaction must be consistent with that. We are a central bank that has so far cut interest rates by 200 basis points in reaction to the shock, in three steps from March to May. In the financial stability area, we decided to release a significant part of the countercyclical capital buffer, that is, we strengthened banks’ capital. We switched off, so to speak, the income indicators in the area of mortgage regulation. We prepared some new instruments to provide liquidity to market participants, primarily banks, but also non-banks, instruments which are in place today but no one has used so far. It hasn’t been necessary to use them, because it still holds true that the Czech banking sector is operating with a large liquidity surplus.
As for the monetary situation, the price stability situation, as we know from the available figures and also from our current forecast, for now we are certainly in no sharply disinflationary situation and we by no means see a risk of anything approaching a deflationary trend. So, the fact that we are discussing the possibilities of, say, unconventional instruments potentially applicable under relevant conditions, is purely hypothetical and theoretical at the moment. It is highly likely that the discussion won’t even progress from this position, as it won’t be necessary. We simply don’t have the need.
The fact that many central banks around the world are using such instruments massively today is simply due to their situation. They didn’t have the luxury of being able to lower their standard instruments such as interest rates as forcefully as we did. You won’t find that virtually anywhere around the world – the Fed to some extent, but even it didn’t have as much room as we did. In the large majority of jurisdictions we are talking about in the context of unconventional measures, there is no liquidity surplus in the banking system like there is in our case. And, of course, many of these countries probably have a greater need to support the domestic government bond market, a need which currently certainly doesn’t exist in our country either. Not a sign of it.
So, we are discussing these things, of course. As a matter of principle, we do not rule out any of the theoretical options from the available repertoire. However, it is clear that it simply isn’t necessary to deploy them now, so it isn’t necessary to comment on this in detail either. We will see how the situation unfolds. Our rates still haven’t even reached zero at the moment. In fact, there’s currently no way we can help. We have done our job with regard to both monetary policy and financial stability policy. At the moment, there are no obstacles to economic recovery on the part of our policies. There is nothing preventing lending to firms. There is enough – more than enough – liquidity in the banking system. There is no price instability. The situation is basically stable and will continue to converge to our target in nominal terms as well.
So, there is nothing extraordinary going on at the moment, and there’s no need to add anything to that. Of course, we have some theoretical and practical experience with the use of some of these instruments. For those where we don’t have such experience, we are studying the experience of other countries. But when we look at it, it is always conditional on the specific situation and the need to apply such instruments to fulfil the objectives we have, namely price stability and, as the case may be, financial stability. We are currently fulfilling these objectives using our standard instruments.