Transcript of the questions and answers from the press conference

I’d like to ask about the forecast and the implied path of market interest rates. We can see in the forecast that inflation is expected to be broadly the same as previously predicted. The expected koruna exchange rate doesn’t differ much from the previous forecast either. Growth will be much lower next year due to the second wave of the pandemic, but the projected interest rate path has increased significantly. I’d like to ask, what is the change – as you said in the statement – that will allow the Czech National Bank to start moving away from extremely easy monetary conditions.

There was a long discussion about this. The last sentence of the statement I read out to you also suggests that a significant majority of the Bank Board basically believes that in reality the correction of the low interest rates to some sort of normal will probably take longer than the forecast currently indicates. The forecast is naturally determined by the assumptions entered into it. To simplify and shorten it a lot, the assumptions are basically saying that the second wave should be subsiding visibly in the spring of next year, and the situation should – epidemiologically and hence in terms of the functioning of the economy – return approximately to the level we saw this summer roughly by the middle of next year. That is a level that clearly enables the economy to gradually return to the pre-crisis normal.

In this context, there is a need for a monetary policy response in the form of a gradual reduction of the high degree of easing we now have in our monetary conditions. We must bear in mind that we have a weakened koruna, which is one channel of easing compared with the pre-crisis situation, and we have lower interest rates – significantly lower in terms of the change in level, as our rates were at 2.25% just before the crisis. At the same time, we still have relatively visible inflation, which so far is even somewhere near the upper boundary of the tolerance band, i.e. currently about 3%, and even if it declines gradually as forecasted, it should still be close to our target or even slightly above it.

So, if you put this picture together, there is good reason to start thinking about how to gradually normalise the situation in terms of the settings of the monetary conditions. I would like to stress that in our future monetary policy decisions during next year we’ll be targeting inflation sometime in 2022–2023. And that is the period when we assume the pandemic and economic situation will have fully normalised, to simplify it like that. So, this view may appear too optimistic through the lens of today’s situation, but the baseline scenario does indeed work with this trajectory, which I think is well supported by arguments. It simply assumes that during next year the situation should return gradually to, say, the state we saw this summer. After that, 2022 and 2023 should be de facto normal from this point of view. So, that’s the reason for the signal that around that time we should start thinking about a gradual return of rates to a more normal level. At the moment, we have deeply negative interest rates and, as I said, our monetary conditions are very easy. However, that was our monetary policy response prompted by the unprecedented onset and depth of the crisis. And that is alright for the situation this year and, as we can now see, next year as well.

A question on a similar topic, but a simpler one. From today’s perspective, is it possible, or more likely, in your opinion, that rates will not be increased at all during the whole of next year?

We can’t rule it out. It’s one of the scenarios we have to take seriously, a scenario that is somewhere near the upper bound of our considerations so far and is based on the variant that the domestic and, above all, foreign situation will indeed be bad in terms of restrictions and shutdowns, not only now for several weeks, but basically also for a large part of next year. In such case, it’s clear that the start of the return to more normal rates would be postponed.