Transcript of the questions and answers from the press conference

You said the Czech economy should be disrupted only partially by potential pandemic problems and has learned to live with the pandemic, but the estimate for GDP growth next year is more restrained than in the previous forecast. Why is that?

We have increased the estimate for this year quite significantly, to around 3.5% from the previous one of less than 2%. I’m not sure what the original spring estimate was – I think 1.2%. The estimate for next year is more or less the same as in the previous forecast: 4.1%, i.e. 0.2 percentage point lower. I wouldn’t attach any great weight to that. It may be related to this year’s base, as we have significantly increased the estimate for this year. So, the index may then be slightly lower, of course. But still, in level terms, we assume that the GDP created this year especially, but also next year, will be higher than our spring estimates. So, we see no problem there.

I’d like to ask you to interpret the new market rate forecast for us. Purely from the model perspective, if everything goes according to the forecast, how many rate hikes of 0.25 percentage point does the forecast imply this year, and how many next year, if it’s possible to put it like that. And to what extent is the Bank Board in agreement on the new forecast, the new rate outlook? Related to this, you presented the inflation forecast, where inflation approaches 4% at the end of this year, i.e. well above your tolerance band. So the logical question is whether such developments call for a more forceful reaction on your part.

The forecast does indeed continue to expect the inflation pressures to rise, even more so than the spring forecast. It basically implies a hike of 50 basis points at today’s meeting and hikes at least at every subsequent meeting this year, but also further hikes in 2022, especially in its first half.

The Bank Board had a long – and perhaps in some respects complicated – discussion on how to calibrate the speed of our reaction. We strive very much to get back to our target where possible in the medium term, i.e. over the horizon of effective transmission of our monetary policy, in a year, a year and a half. I’m afraid we can no longer influence the second half of this year with our decision today. That simply can’t be done under inflation targeting. Although we didn’t announce any explicit exemptions for certain factors that would probably deserve it due to their nature, it’s clear that inflation this year is being strongly affected by one-off factors such as the jump in oil prices and, in turn, fuel prices, fundamental price shocks in the commodity area, such as various materials, be it in engineering, i.e. various metals, or in construction, ranging from metals to plastics to wood, and so on. These things are beyond our reach. Of course, we do try to influence the derived domestic price categories and the part of inflation we call core inflation, i.e. the part caused by domestic demand pressures and partly also cost pressures.

Without wanting to go into too much detail, I can confirm what I announced after the previous monetary policy meeting, that we are ready to increase our interest rates further, basically at every subsequent meeting. At the same time, we don’t want to do it in a forceful way, because there’s no urgent situation requiring that, in our opinion. The Bank Board has a slightly less escalated view of this than the forecast, but that’s normal. We simply take into account other aspects in addition to the model calculation per se, even though the calculation is of course made using expert judgment. We do not perceive the recovery that unambiguously. We see more risks of various types which could slow the recovery and the related cost pressures.

But the direction is clear. The direction is, yes, we have strong inflation pressures here, driven significantly by the external environment, but to some extent also by the domestic economy. For example, we are saying that the labour market cooled only very slightly in the crisis, and we can see a turning point where it starts to overheat again. By definition, this is likely to generate further demand-pull inflationary pressures in the future, so we want to react – and are reacting – to that.

At the same time, as I said, there is no fatal urgency here. Yes, we are going to be well above our target now for some time, and probably also above the tolerance band for some time. However, we must subtract from that those things that are external and independent of us.

To obtain a broader context, we must bear in mind that, even so, our inflation will be somewhere in the upper half, but not at the extreme edge. There’s much higher inflation in our neighbouring countries, in Poland and Hungary. Inflation in Germany is already at 3%, to say nothing of US inflation, which is oscillating somewhere between 5% and 6%. So, this is currently a global phenomenon. We are a part of it and cannot prevent it. But we want to react to it and are actively reacting to it. We are clearly saying that we will continue to do so, so it’s a temporary thing.

You mentioned that today’s meeting was attended by the Minister of Finance. Can you say which topics you discussed, for example the budget or the evolution of public finances? Or was it just a courtesy visit?

The Minister exercised her right to attend Bank Board meetings. We were glad she did. She attended our standard monetary policy meeting, in both the broader composition and the narrower one – of course with the exception of the vote, during which only the Bank Board members are present. She presented her view of the economic situation. I’d say there was mutual understanding – on our part regarding the fiscal policy steps taken during the crisis, and on her part regarding the actions we took. We agreed that we acted in harmony during the shock and went in the same direction.

Naturally, from the fiscal perspective, the emphasis is now on very gradually scaling back the expansion. We are saying we want to start reducing the monetary policy expansion quite systematically and clearly. I want to stress that we certainly are not going down the road of belt-tightening and restrictive monetary policy. In fact, to borrow a metaphor from one of my colleagues, we are just taking the foot off the gas. We are not stepping on the brakes. We are taking the foot off the gas, as we had, and still have, very easy monetary conditions. We must take into account that our key rate will now be 0.75% and we have almost 3% inflation. So, in terms of real interest rates, we still have one of the lowest rates in Europe and in the world. We are now reducing this a bit, as we think the economy no longer needs this kind of doping that much. And we see our primary objective, price stability, much more on the radar.

Of course, the perception of the person responsible for public budgets and fiscal issues may be slightly different, but I’d say there is no great divergence going on, and it was useful to hear the Minister’s observations.

You said the new forecast implied a hike of 50 basis points for today. You also said, which is probably related to that, that the Bank Board sees the risks to the forecast as being slightly anti-inflationary. I want to ask whether this can be interpreted that the Bank Board better liked the interest rate path indicated by the previous forecast, which was roughly 0.2–0.3 percentage point lower than the new one. Is it possible to put it like that?

A second question: were there any new arguments from those Bank Board members who did not want to raise rates at all, or from the member who wanted to raise them faster?

What the Board liked better… we work with what we have. There’s not much point in returning to the past. The new forecast is based on new data. I think the forecast is of very high quality. We commended our colleagues for the very consistent story embodied in the forecast. So, we have no objections to it in principle.

As I say, because we also consider other context and circumstances, we are saying we think that if we proceed at a moderate pace with hikes of 25 basis points, we will basically make no fundamental monetary policy error. This is probably the whole difference – it’s more a difference in fine-tuning.

We are saying, in contrast to the forecast, the difference may also be that the forecast views developments over the next two years with optimism and certainty and a large degree of confidence. We are saying: yes, but some things are still uncertain. They may return. They may have a dampening effect on the economic recovery. And this may also have consequences for our price level forecast. So, it’s really a subtle difference. We are also saying that we view the risks as slightly anti-inflationary.

As regards the arguments of the colleagues who were in a slight minority and didn’t want to raise rates, I’d say the arguments were not new. They are concerned that this is premature, that the uncertainties are still large, and that this – in a way – monetary policy stimulation should continue. This is in contrast to the colleague who says: no, it’s better to take a faster step at the beginning and then perhaps fine-tune gradually.

If I were to compare it with the previous meeting, I’d say that today even some of us who eventually voted for the majority view were considerably closer to perhaps even supporting an increase of 50 basis points. This may be the only perceptible difference between the previous meeting and today. Otherwise, it was very similar in terms of the arguments used and the outcome.

I want to ask about a factor that has not been mentioned yet, namely property prices. I’d like to ask about the Bank Board’s view of their level and how this affects the decision.

This is of course a phenomenon we perceive. We perceive it in our dual role as guardians of price stability and above all as guardians of financial stability. We have indeed been recording growth in this for a long time. We can see very vigorous developments on the property market and we are particularly interested in the property financing market, i.e. the mortgage market.

For example, the European Central Bank basically does not look at property in its index. It uses the Harmonised Index of Consumer Prices, the latest known level of which for our country is 2.5% if I’m not mistaken, whereas the index we use is an overall one including imputed rent, and it is 2.8%. So there’s a difference of 0.3 percentage point.

Because we have an element of property price growth incorporated into our index – and, we think, in an appropriate way – we also react to changes in these prices with our monetary policy, as we look at our headline consumer price inflation index.

Other than that, we paid no special attention to this phenomenon today. We can see that loans for house purchase are rising apace, but we will discuss this in greater detail in the autumn in the context of our regular meeting on financial stability issues. It was not explicitly the subject of any discussion today. But as I said, it is implicitly included in our monetary policy.