Transcript of the questions and answers from the press conference

Could you please specify how realistic it is that interest rates might yet move in some way by the end of this year, and what the circumstances would have to be?

At the moment it seems unlikely. Of course, if data arriving from the economy in the meantime were so different from those expected by the forecast now, this could possibly lead to a correction of the current expectations and of the assumption that interest rates will remain stable for the time being. However, as I said, I consider it very unlikely, especially in the time left until the year-end. That isn’t very much time. I don’t think anything extraordinary will happen in this period that would require an immediate reaction from us.

A technical question regarding the new market rate forecast. Is the interpretation correct that, if the forecast materialises ideally, we could see growth in your monetary policy rates as well in the second half of next year?

And a related question about the debate today. Could you please compare it with the previous debate a month and a half ago, which was whether or not to ease policy further. Since then we’ve had inflation above the upper boundary of the tolerance band and core inflation at record levels. Was there any shift in the debate today towards the question of whether and when to start signalling a tightening of the monetary policy conditions? Could you please compare the two debates in this respect?

The debate was certainly much calmer and reflected the rather comfortable situation we are experiencing so far from the perspective of the monetary authority, in the sense that we are certainly not facing an acute need to ease monetary policy further. At the same time, it is clear that the current deviation of inflation above our tolerance band is temporary, even though the new forecast shows that this temporary situation will last somewhat longer than we originally thought. However, it’s something we don’t consider destructive or threatening from the point of view of overall macroeconomic equilibrium, so we are prepared to tolerate it temporarily. We are living in a very specific period of the biggest economic shock in our history, and it is clear that monetary policy can’t be conducted in a purely technicist manner and that we have to consider to a greater extent the entire macroeconomic context, both domestic and foreign, because we are a small open economy. That characterises the debate.

Today, there was in fact no debate on the need and preferences for potential instruments for easing monetary policy further at a time when our standard interest rates have reached zero. As regards the other side of the coin, tightening monetary policy wasn’t discussed either. The forecast shows this at the end of its horizon, but it’s clear to you – because you know the mechanics of the forecast – that the forecast by nature tends to reach the pre-defined parameters, i.e. the steady-state levels of the key indicators, at the forecast horizon. We currently have rates tilted to zero, so they are not standard. So, there is a technical suggestion in the forecast that rates could gradually return to normal if everything else materialises in the way the forecast foresees. In the context of the macroeconomic situation, however, I can’t quite imagine that, certainly not before, say, mid-2021.

I don’t want to go too far with too strong a statement, but it seems to me that the economic recovery won’t be easy, as the shock is very deep, and is moreover of a very specific nature. It is structurally uneven, in the sense that there are sectors which are strongly affected, typically those connected with travel and related services. But there are also sectors experiencing their biggest booms, as there is extraordinary demand for their specific products or services – typically health care accessories, pharmaceuticals and so on, perhaps also some telecommunication services.

There are also some other tendencies which were certainly present before Covid but are taking on new dynamics with the Covid shock. Two examples: first, even before Covid, there were signs of certain deglobalisation tendencies – efforts to shorten global production and value chains to a greater or lesser extent, for various reasons, usually not purely economic ones. This is of course taking on new dynamics given the experience of the pandemic. Second, there were structural changes connected with the greening of some sectors – typically the automotive sector, which was going through a large structural change dictated de facto by political will before the pandemic came. This is going on and will not stop, but it is now present in a different environment, a much more complex one.

So, I infer from this, and I think our forecast has also shifted somewhat in this respect, being slightly less optimistic with regard to next year, that the recovery will be somewhat slower. That’s also why we are saying that we won’t reach the pre-pandemic level until the end of 2022. I think such an environment will probably prevent a rapid return of rates closer to normal. Although the forecast involves such a return – but as I said, this is partly for certain modelling reasons – I think this is something where the forecast will be corrected by expert judgment and the return won’t be as fast as forecasted. In general, it is very difficult to forecast using our standard instruments in these times. Although the forecast sticks to its rules and works with the models we normally use, the weight of expert corrections is much greater today than in normal times.

A question regarding the assessment of the risks after today’s meeting. The Bank Board assessed the risks as being significant, which is a shift compared with the previous meeting, after which you mentioned balanced risks but didn’t call them significant. I want to ask what has changed since the June meeting, whether you can see stronger risks now, or what this actually means.

Well, this is juggling with words to some extent, but I would say the weight and acuteness of the risks certainly hasn’t decreased. It’s very difficult to say whether it has increased and how to measure it. But we feel pervasive uncertainty in our work in terms of predicting the future. One of my colleagues called it “greater than great uncertainty”. So that’s probably why we used the adjective “significant”. The risks are listed there. It’s a matter of what course the pandemic takes and the possible measures restricting freedom of movement and assembly, and so on.

We perhaps view the koruna exchange rate as being a slightly stronger risk than previously, but that’s a standard risk, I would say. We have seen it firming over recent weeks, but we feel that it still holds true that the koruna exchange rate, as in the case of similar currencies, is being strongly affected by market sentiment. It’s a very fragile thing: just like the koruna has shifted by several tens of hellers over the last few weeks, it can also shift in the opposite direction very quickly. Sentiment can turn the trend around with regard to these comparatively risky assets like small currencies, so we have to take that into account.

Today we discussed the fiscal area a lot – how to estimate the actual fiscal impulses. Many things are mentioned, then only some of them are ultimately approved, and then there is the question of how these things are actually implemented in the economy. Moreover, we are approaching a hot phase of the political cycle, with one election coming up soon and another one shortly after that. This area is crucial for us and is external to our forecasts, and we have to take it into account.

And I must also say that, with regard to the thing that has shifted probably the most visibly, namely short-term inflation, we have some explanations, but we are not certain that we know everything about it perfectly. As we see it, many firms, especially commercial ones but also other ones, are trying to make up losses from the lockdown period to some extent. The market situation seems to be enabling that so far, so margins are temporarily increasing somewhat, which is one of the reasons why prices are slightly higher than we originally expected. The question is whether this alone is a sufficient explanation – it certainly isn’t. So, that’s the area of consumer prices and perhaps some specific consumer price segments.

So, “significant” means that there’s a whole range of risk components that may significantly affect the materialisation of the forecast, but there’s nothing specific there in the sense of this being something completely new.