Transcript of the questions and answers from the press conference

It seemed before today’s meeting that interest rates could peak at around 4%. According to your estimate, after the further sizeable increase today, what might be the ceiling at which interest rates stabilise?

I must confirm and concede that the target we pursue has been a rather moving one recently due to the very turbulent events in the domestic and global economies. It is moving constantly higher in terms of the necessary interest rate level we would like to achieve to effectively dampen the inflation pressures. In normal circumstances, the targeted neutral level is around 3%. But in a situation like this extreme surge in inflation it is of course higher. With today’s decision, we have moved significantly towards the 4% level. It’s more than likely that we will reach or exceed that level at our next meeting. And I’m afraid that probably won’t be the end of the necessary adjustment of interest rates to the situation.

So, I don’t want to be a false prophet and gaze into a crystal ball, but it’s clear that in this situation, when we are indeed facing an exceptional combination of various very strong inflation pressures over a relatively short time span, we’ll have to move significantly above 4%. I really don’t want to speculate how significantly now. We’ll see. Our inflation targeting horizon – the situation a year or a year and a half ahead – is always important for us. At the moment, unfortunately, we still see inflation well above our target even at that horizon. That’s why we have reacted with this rather forceful increase. We’ll see what the future brings, and what the new forecast prepared for the February meeting brings.

Two questions. Did you discuss the possible opposite effect to the inflation pressures you are talking about, namely the impact of the rapidly rising energy prices on households’ ability to spend? In this context, do you see any possibility of a cooling of demand and a cooling of firms’ investment activity driven by costlier loans and by rising input prices, falling margins and cash flow in firms?

My second question: given this exceptional situation, did you discuss the possible use of the international reserves to help return inflation to the target?

As for the effect of the sharply rising energy prices on the total consumption of the population, our colleagues from the Monetary Department prepared a short analysis attempting to estimate this effect. It is of course a simulation based on certain assumptions. As you know, there are two main opposing factors at work. When an essential consumer basket item – some basic need such as energy – goes up in price, on the one hand there’s an income effect at play: you have less money available for other spending. On the other hand, it may also cause a tendency for some consumers to spend part of their savings now rather than in the future –  to prefer immediate consumption to future consumption – due to concerns about further growth in prices. These two tendencies interact and co-determine the resulting effect.

Our model example for the time being estimates that the impact of rising energy prices could reduce consumption by around 2.5% on average over the year, but of course especially during the period of the strongest impact, approximately the first half of the year. So, it’s not negligible, it’s a sizeable decrease in consumption. This is incorporated into today’s update of our macroeconomic considerations, which was the basis for today’s decision. So, we see it and expect it. I’m afraid it’s very hard to estimate whether it will have any major effect on short-term growth in prices, because the latter is being driven largely by cost pressures. So, it probably won’t help us in the short term, but it may have an effect in the longer term, and our considerations take it on board.

As regards the use of international reserves, we didn’t discuss that. It was mentioned, but all that was said was that we announced a month or two ago that we would resume our previous programme of sales of part of the income on the international reserves in January 2022. That holds true. We will do it. We have specified some parameters and we will proceed accordingly.

I’d like to stress that the aim of this step as we announced it is not to conduct active exchange rate policy. We really don’t view the exchange rate as a primary monetary policy instrument at the moment. We know these things are interconnected, of course. There’s no point hiding it or being mysterious about it. Clearly there is now ample room for the exchange rate to firm, so I think these things may have a positive synergistic effect.

When we launched the programme, we announced that we would evaluate it after a relatively short time, say in a few months, and then maybe modify its parameters. But at the moment, what we decided back in October still applies. We’ll see.