Transcript of the questions and answers from the press conference

The GDP growth forecast is now much lower than before and also much lower than the forecasts issued, for example, by the Ministry of Finance and some other banks. Why is that?

I summed up some of the reasons. We were already cautious in the previous forecast. If you compare our outputs with others’, our forecast was quite a bit lower at that time as well.

We’re in the first half of May, and the end of the first half of the year is not far away, and we are still relatively strongly constrained by various pandemic-related shutdowns and regulations. So, this situation reflects our scenarios of a more gradual fading of the pandemic and all the restrictions. This situation is naturally affecting the performance of the economy, as a large part of the economy in terms of the GDP that is generated in services and related sectors is more or less paralysed.

I also mentioned the issue connected with certain stagflationary tendencies, which we are feeling more from the global environment. It’s nothing specific to the Czech economy. You’ve probably noticed that quite substantial production capacities have been forced to restrict production, albeit temporarily and possibly only partly, but they are not producing the quantities that they could generally be producing and that were planned. This is due, for example, to shortages of electronic components and to problems in logistics. These things are affecting overall economic performance.

We will probably record strong year-on-year growth now in Q2, because the comparison base from 2020 Q2 is very low. However, although Q1 turned out better than our previous forecast had expected, a decline in output was still recorded. So, to achieve higher growth figures, say something like 3%, the performance of the economy in the second half of the year would have to be incredibly high in terms of the growth comparison. And we’re not expecting that at the moment.

So, we are somewhat more sceptical. We may be wrong, of course. It’s just a forecast. To be honest, there’ll be no major impact on our other considerations if we make an error of a few tenths of a per cent, or even one per cent.

We are very cautious with regard to this year. On the other hand, next year – for which we have increased the growth forecast – we expect the economy to make up to some extent for this year’s shortfall caused by the shutdowns becoming lengthier.

Looking at your new forecast for market interest rates, the average for this year is the same as in the previous forecast, so the path is the same as the already rather hawkish one in the previous quarter. That implied roughly three key interest rate hikes, if we convert market rates to key rates. Since then, the Bank Board has cautiously opposed this several times, commenting that it may not be that much. After all, the financial market is also expecting one or two hikes by the end of the year. Last month you yourself said that an interest rate hike could probably start to be considered with the next official forecast in August. So, I want to ask about the Bank Board’s view of the fact that the interest rate outlook in your Monetary Department’s new forecast is like this. And should we continue to expect August to be the key moment when we should expect a serious debate on the first hike in key interest rates?

You are right, our debates this year have been along those central lines and probably will remain so at the monetary policy meetings ahead.

I would emphasise something that is perhaps new and slightly different from at least the previous two rounds. I would say that the opposition to the forecast today was mostly much subtler and weaker than before. This means that I feel there is a strong view among a significant part of the Bank Board that the situation is becoming clearer, at least from the short-term or medium-term epidemiological perspective. It seems that vaccination has at last been rolled out to the extent necessary for achieving herd immunity and hence a more lasting lifting of the various restrictions. This means that we subsequently expect a relatively fast pick-up in consumption and, in turn, other related economic activity. We have more than CZK 200 billion in deferred savings, forced savings, because there has been nowhere to spend the money. I don’t even include various precautionary savings in that.

There is a very solid outlook for most of the relevant foreign countries. This is true of the more distant ones, with the US and Chinese economies growing rapidly, and it is also largely reaching us indirectly via Germany. So, the outlook is quite optimistic in this regard. At the same time, however, we can see some new inflation pressures that may have been less certain previously and now we see them as much more likely. That’s also why we have unfortunately had to slightly increase our inflation forecast for the next six months or so.

All this together creates a situation where we can see that it won’t be necessary to keep rates as extremely low as they are today for too long. On the contrary, it could be counterproductive with regard to future price stability over the monetary policy horizon.

So, the opposition to the forecast was not strong and I expect we will return to the debate on interest rates. We will certainly return to it already at our next meeting in June. I don’t want to speculate now about how many hikes we will make and how large they will be. The situation really is still very volatile and uncertain, and things are happening all the time. But I am now 100% sure that there will be an increase this year, and I am also convinced that we will at least start out on the path towards gradually more normal interest rates.

In this respect, nothing has changed as regards the forecast. It remains more or less the same. But I think our sentiment is changing slightly, as we have less uncertainty, at least with regard to the epidemic situation in the course of the next half year or so. We think that the situation there is really turning around in a positive direction, not only in our country but also in Europe and other important territories.

You mentioned deferred consumption, which you estimated at about CZK 200 billion. Last month you said that it was by no means certain that the whole of this amount would be thrown into the economy at once and that it would probably be more gradual. Are you still of that view, and if you discussed this, is it shared by the other members?

We discussed it marginally. I intentionally said 200 billion, because the full amount in excess of normal savings is almost 300 billion. So I am not talking about the whole of the sum, because certainly part of it is not immediately ready to enter consumption. There are also some methodological issues regarding growth in mortgage loan repayments. But the figure of 300 billion also includes tax relief, which is of course contributing to this. So, it is a large sum. It is macroeconomically relevant. Nobody can tell how fast it will be dissolved in consumption. I can imagine it going in various waves. At first, part will be very quick, in view of the psychological aspects. After all, when all the shops, restaurants and so on open, the need to consume these services and goods will probably be strong. It will also depend on how the price situation evolves.

I mentioned it as one of the factors showing that the recovery is sufficiently well-founded as regards resources and the reasons for it being relatively strong at least in the short term in the second half of the year. Of course, it is also related partly to domestic inflation pressures.

You mentioned that the Bank Board would return to the debate on increasing interest rates at the June meeting. Do you consider it likely that rates could go up already in June?

I don’t know and I won’t speculate. They can go up at any time at any monetary policy meeting. I certainly dare say that the next movement will be up, not down.

One more question on a similar topic. Based on all you said, it looks like you are now more convinced that interest rates could be raised sooner than you expected one or two months ago, or that there could be more hikes than you as the Bank Board expected one or two months ago. Is that correct?

I wouldn’t say that. I think there is no urgency so far, at least in the sense that any substantial force is necessary, that we are facing a significant wave of inflation over the monetary policy horizon. I don’t think so. On the contrary, our forecast now says that we will go back towards 2% in a year. The short-term pick-up that we expect to occur in the next few months can no longer be influenced using our monetary policy anyway. And it is largely due to factors that we would have to exempt in any case, because, as I said, a lot of it is cost pressures, which are not and cannot be under our control, or food prices, which are of a similar nature, and fuel prices.

So, I don’t think there has been any change in the degree of forcefulness being considered by the Bank Board or at least some of its members. However, I think the uncertainty as to when we should start has decreased. There is no need to postpone the start too much, because we can see that we will go in this direction in any case. And, more or less, as for the biggest threat we are experiencing today, namely how we are handling the epidemic, we think it is becoming clear that vaccination is working. On top of that, there is a high degree of natural immunisation in our country. So, we think that over the rather short horizon we are interested in – half a year or a year from this perspective – the degree of uncertainty has fallen substantially.