Transcript of the questions and answers from the press conference
I want to ask about the inflationary risks. Can we infer from this that the May forecast, which is indicating three interest rate increases for this year, should still hold true? Do you think this is realistic, or did you raise any objections to it? In addition, could you please describe the factors or new information that led to the relatively urgent need to raise rates in June and not, say, in August, which was the other option you considered. I infer the urgency from the fact that one Bank Board member voted for a larger hike. I also compare this with the situation, for example, a month ago, when you said there was no need to hurry raising rates and that you would rather err on the side of starting later and then catching up than to err on the side of starting earlier and prematurely. What has changed over the last month or month and a half that has shifted your view in this, say, more urgent direction?
As for your first question, i.e. whether we still consider it likely that the forecast will materialise as regards interest rate increases up to the end of this year, I’d say it’s one of the likely scenarios. So, yes, if the situation continues to develop in the months ahead in the same way as it has up to now and we see that the economy is clearly recovering and the pandemic situation is receding, it can be assumed that this was the first step in gradual moving our interest rates – our key monetary policy instrument – towards normal levels.
That brings me to your second question. What has changed is the fact that today we basically no longer have any doubt that the pandemic and its impacts – in the sense of various restrictions – are receding. This is even occurring rather earlier than we expected in, say, the baseline scenario, and it’s also occurring faster in the sense of the pace at which the restrictions are being eased. In view of the ongoing vaccination process, and in our case also in view of the relatively high rate of herd immunity gained through infection, I think the probability of major restrictions returning over the monetary policy horizon has decreased substantially.
We are not saying that Covid has ceased to exist, certainly not. That isn’t our role anyway. We are aware of the existence of some new strains and so on, which, of course, may also gradually spread in the Czech Republic given the holiday season and greater mobility of the population. However, we think that the population is now much better prepared for this potential situation and that it should not lead to across-the-board restrictions.
For this reason, we are no longer facing the problem of uncertainty as regards the recovery of the Czech economy. We can see that the Czech economy will eventually grow – for the year as a whole – rather more than our sceptical approach indicated in the spring, which is when the current forecast was prepared. However, we are gradually adjusting it, and we’ll have a new one in August.
With this, we are in fact saying that a gradual return to more normal rates is needed. It is not possible for us to have, in the long run, [such low rates] coupled with economic growth of 3%, and next year perhaps 4% or more, which will bring us to the pre-Covid level next year, hopefully already in the first half of it.
We can see that the labour market has cooled somewhat, but very little, and that the signs of it overheating which we saw before Covid are becoming visible again. We can see that household income hasn’t been hit much, partly thanks to compensation via the fiscal channel.
So, from the perspective of macroeconomic equilibrium, this is definitely consistent with higher rates than those we have had up to now. And we want to move gradually to such rates.
So, as I said, it is possible that we will raise rates at every subsequent meeting, which would probably get us reliably to the level currently predicted by the forecast.
Under inflation targeting, we work with expectations. That is the core element of our functioning and thinking. We are aware that, given how the situation has developed, with no sharp decrease in domestic inflation even in the crisis, coupled with the current supply-side complications in supply chains, we are clearly sending out a signal that we will certainly not regard inflation as a negligible phenomenon. It is our primary focus. We are tasked in our mandate with maintaining price stability, i.e. constantly endeavouring to be close to our inflation target of 2% over the monetary policy horizon. So that relates to this, of course.
Could you please give us some details on the arguments of the three members who voted differently than the majority, i.e. the member who favoured a more forceful step already today as well as the two members who still preferred rate stability.
I’m not sure whether I’ll be able to capture all their arguments, as the debate was long.
The one colleague who voted for a rate hike of 50 basis points today basically used similar arguments to those I have already mentioned: there is nothing to wait for; we know that the economic story will not change before August and that we will continue to see an ongoing reopening and recovery of the Czech economy with a relatively very favourable outlook.
At the same time, we are in an environment of strengthening inflation pressures. Some of them are coming from abroad. They are now predominant to some extent, but they are clearly short-term and largely one-off in nature, and some of them are sure to subside relatively quickly. But others are coming from the domestic environment, where we can still see relatively visible – and in some sectors robust – wage growth. We can see issues on the labour market in terms of hiring new employees. We can, of course, see fiscal expansion.
So, the colleague who used these arguments considered it useful to start the normalisation of the very low interest rates with a more forceful step. It was a matter of calibration, communication issues and so on – nothing too different as regards the nub of the matter compared with the view of the majority which then voted for a hike of 0.25 percentage point.
With the two colleagues who were in favour of keeping rates unchanged, the view prevailed that the economy needs to be given additional room for further consolidation. They mentioned uncertainties in potential further waves of the epidemic – the Delta variant and so on. They mentioned the interest costs of small and medium-sized enterprises, for which the pass-through to loan agreements is probably the fastest. So, it was an approach that, I’d say, probably put more emphasis on the macroeconomic and society-wide costs than on the fight against inflation.
The debate you described sits in the global context, where the issue is whether the inflation pressures from oil prices and the supply chain problems are short-term or long-term. In the USA, where the economy – in terms of its dynamics, the labour market and inflation – is currently very similar to the Czech one, or in a similar phase of the cycle, central bankers decided to significantly postpone the tightening of monetary conditions because they believe that the pressures are temporary. Could you please put the Czech situation more in the global context? Is it different from the rest of the world? Is the Czech attitude to inflation different in any respect? And is this playing a role in your decisions?
We are certainly different in many respects. By comparison with the USA, our mandate in this regard has a single criterion. That is, our mandate is price stability, whereas the Fed’s mandate is price stability plus employment.
That’s the first thing. The second thing is that the situation is different. In the USA, unemployment surged following the outbreak of the Covid crisis. In our economy, as we know, the increase was minimal. Even today, we can see that the labour market is slightly overheated – despite having cooled to some extent – rather than being underheated to any significant extent. We still have, at least nominally, more job vacancies than job applicants. That’s another bit of context.
As for the inflation pressures being a one-off, we are basically in agreement with the global view of our colleagues from other central banks that a large proportion of the price swings we are now observing in certain commodities, various global intermediate products, raw materials and components is temporary. The supply chain disruptions will resolve themselves in time. The question is how much their effects will pass through to inflation expectations in individual jurisdictions and national markets, and to what extent the elevated levels will persist for a longer time or permanently.
We are concerned that part of these effects will remain in the economy for good, passing through to economic relations, and we can’t assume they will disappear almost completely on their own. We are not that optimistic in this regard.
Of course, the level of development of the economy and the markets also has a bearing on this. We had elevated inflation even at the height of the Covid shock. It was roughly at the boundary of our tolerance band, or last year even slightly above it in some months, so we saw no major decrease in inflation below our target. We must also bear that in mind.
So, on the one hand, we are of course being affected by very similar phenomena. But on the other hand, our situation is simply different than that in some other currency zones.
Can you elaborate on what you said earlier, as evidently different people understood it differently? You said that it’s possible that rates will be raised at every meeting up to the end of the year. Did you mean every meeting, or any meeting? Because if rates were raised at every meeting – and there are still four meetings ahead – we could see four more rate hikes this year in addition to the one we saw today. Can you tell us what you meant by that?
Certainly. First, I meant every monetary policy meeting. Second, as I said, it’s possible. If we feel the need to normalise interest rates and hence monetary policy conditions at such a relatively fast pace, it can’t be ruled out. I’m not saying that we’ll do it, and I rather hope it won’t be necessary. But the decisions we make today determine inflation in a year or a year and a half from now. We aren’t fighting current inflation any more. That battle is over and we can’t win it.
We are unable to effectively influence some components of inflation, such as energy commodities, food and so on, with our decisions anyway. However, in the Czech Republic, maybe unlike other regions, we see inflationary domestic sentiment and a certain tendency towards a change in inflation expectations to higher inflation levels. This has been confirmed by various surveys, and we have to respond to it. So, we are resolved not to hesitate and to adjust rates further as necessary.
I have two questions. The first one is also about the temporary nature of some inflation factors. As you said, some may have a more lasting effect on economic relations and some will probably disappear. Aren’t you worried that those that will disappear, such as some key inputs in industry – most notably chips – and rising energy prices, will do so only very slowly? And the second question is whether we need the government to stimulate demand further given the strong inflation pressures we are currently seeing?
We don’t have worries. We try to analyse things with a cool head. As I said, we can’t be sure that the temporary pressures will subside quickly and completely. We simply can’t be sure. The supply chain disruptions are substantial and may last a couple of quarters or even a couple of years. So we can’t really expect these pressures to subside rapidly.
However, there will of course be some surprises. Some things may happen very quickly. There may be new prices and new suppliers in six months’ time. Due to phenomena related to year-on-year index comparisons, we may see strong declines in some prices from year to year. But that’s a matter of statistics.
As for the stimulation of the economy, I expect it to diminish gradually as the need for compensation measures such as the past and present support schemes diminishes. I think this is consistent – or should be relatively consistent – with our approach. As the economy returns to normal and is no longer limited by any administrative restrictions due to the pandemic, it is appropriate to phase out the support measures.