Transcript of the questions and answers from the press conference

Given the relatively strong comments in your statement, I’d like to ask why you have increased rates by just 50 basis points and not more. Could you hint at what increase the Monetary Department recommended? Was it for a larger or smaller increase, and why did you differ from it, if that was the case? Could you please comment about the stagflation concerns you have mentioned recently, the possibility of Czech economic growth halting completely or even a recession arriving? Did you discuss or reconsider this position in any way, perhaps in view of today’s underlying documents from the Monetary Department?

We had a very detailed debate today and I think it was very complicated. I think this is natural, as our decision-making is taking place in an environment of extreme uncertainties, instability and risks. This is a very complicated situation. I’m sure none of us has ever experienced anything like this, and hopefully we won’t experience it again for a long time to come. Moreover, we only had an update of the current forecast, the still officially valid winter forecast. However, so much has happened in the meantime, in particular due to the outbreak of the conflict in Ukraine, and this has de facto completely changed many of the assumptions. Yet we can’t abandon our decision-making role. We must decide regardless of the degree of certainty we have, which is now extremely low. But even if we didn’t decide, that would be a decision too, and we can’t afford that.

So, as I described in the long statement, we discussed the situation. It is clear that the risks are more on the inflationary side, certainly with regard to the current forecast we have updated. Of course, we realise – our colleagues from the Monetary Department as well as the Bank Board members – that the situation is changing so dramatically in terms of the external cost shocks, but also in terms of all the disruptions that are already visible in the economy or may potentially appear going forward as a result of the shock, that it will also lead to weaker economic growth. For the time being, the update says that we’ll be glad if the originally expected growth of around 3% falls only to half that figure. However, I think that, unfortunately, new information may arrive any day that will further affect the future forecast in the direction of lower economic growth.

There are also some anti-inflationary factors, but they are mostly at a more distant horizon rather than the immediate one. At the immediate horizon, it is clear that all the complications are fostering a further escalation of prices, mainly for the reasons I mentioned in the statement. It is clear that the shocks are external and cost shocks and that we are unable to eliminate or offset them immediately using our instruments, i.e. interest rates, to a sufficient degree, or almost at all. However, we clearly cannot ignore this, because even these shocks of a primarily external and cost nature also feed through to domestic inflation in the subsequent stages of production and supply chains.

So the debate was about the hike. The recommendation from the Monetary Department came, say, with a slight preference for a hike of 0.75 percentage point. But I’d say it was a slight preference and the difference plays no major role. At least that’s how we discussed it with our colleagues in great detail. I think the factor that swung it for the majority that voted for the motion – with some of us being ready to vote even for the motion that was 25 basis points higher – was that no major monetary policy error can occur here, as we are entering this situation – thank goodness – with an interest rate level that is well above the neutral level of 3%. We were at 4.50%, and now we’ll be at 5%. So there was some leeway in this respect. Of course, we’ll adjust it as needed if new data and the new complete forecast which we will have in May show such a need.

Growth will certainly be markedly lower. I’m afraid the outlook is predominantly unfavourable in this segment of the forecast.

Two questions. The first one is about the government’s fiscal policy as an inflationary pressure. Could you please elaborate on that in the context of the refugee wave? What costs and further developments do you expect, and how is this affecting your decisions? The second question relates to the steps of the European Central Bank. You said that you expect interest rates to increase next year. However, would it be beneficial for your efforts if the European Central Bank increased rates earlier?

I would say the fiscal side of the situation was not debated to any great extent today. In our February forecast, we know that the fiscal impulse as it appeared up to then was negative in terms of economic growth, having a slight downward effect on economic growth. In this regard, it was not relevant to inflation, certainly not in the near term. We will see when things become clearer. Higher costs connected with the refugee wave and the integration of refugees are one thing. On the other hand, we unfortunately have higher inflation than predicted, which will slightly improve the revenue side in nominal terms.

So, we think it’s too early and we haven’t made any conclusions so far as regards the assessment of a major change in the fiscal policy segment. I think this is basically not a very substantial issue with regard to inflation, even though it will, of course, involve additional billions of korunas. However, we must bear in mind the amounts this should be compared with, both in terms of the total budget, and in the monetary policy context. So there is no fundamental impact on our policy, at least so far and in the short-term outlook we can see now.

As for ECB rates, we will see how the situation unfolds. Now we can all see that there have been more and more comments from the ECB – which has of course also observed dramatically higher inflation rates compared with initial expectations, particularly in some euro area countries – that it will terminate more quickly its quantitative easing programmes, i.e. purchases of securities, primarily government bonds. And we can hear from some members of management – yesterday I heard the Slovak governor, for example – that they expect the first hike to occur very probably already this year.

So, everything is shifting in the hawkish direction a bit. We will see. From our point of view, this doesn’t have an immediate impact. From the overall global perspective of the fight against the inflation wave, which is clearly more or less global, it would of course probably be appropriate. I am convinced that it would be positive. However, let’s not expect it to have any quick effects on our own inflation, especially in the short term. It may help stabilise the situation gradually during next year, but we’re at the very start. So, we’ll see.

I wanted to ask about your words on the koruna and the fact that the exchange rate has stabilised. You said you could use the central bank’s reserves to stabilise the exchange rate, which in fact has already happened. However, an idea has also surfaced which you yourself have mentioned recently, namely that the reserves could be used directly to strengthen the exchange rate and thereby reinforce the central bank’s anti-inflationary efforts. I’d like to ask if this was discussed today or if this debate is under way and along what lines.

This was discussed, although not fundamentally or in any great depth. I’d say it was mostly spontaneous. We will probably return to this, but for now our assessment of the situation is that the stabilisation worked out well – I spoke about that – and it is implicitly at our disposal and will be activated if needed. Apart from that, we certainly did not decide to temporarily use the exchange rate as a more significant instrument – or even the main instrument – for combating inflation. Today, we decided that we will continue the sales of part of the income on the international reserves. However, this is something that has been going on since 1 January and will continue going forward, returning to normal as it were. So that’s all for now, and no other decision was taken. We’ll see how the situation unfolds. I can’t rule out that the debate will continue, but so far there’s no specific conclusion.

There may be different opinions on this, but we still have room to use our standard instruments – interest rates – and we think we can continue using them.

On the same topic, could you please compare the pros and cons of these two channels – tightening using interest rates and tightening using the exchange rate. What are the views of the other Bank Board members on this? Is there a consensus on this?

Well, I don’t want to turn this into a seminar, but it’s clear that the exchange rate has a faster effect. It works almost immediately. Well, of course there’s a lag before it passes through to prices of imported products. But its impact is not as broad as that of the interest rate channel. So, everything has its pros and cons. On the other hand, we are an inflation-targeting central bank, and interest rates are our standard instrument. We have a managed float exchange rate regime – “managed” basically referring to exceptional situations where we need to step in. We prefer, as a matter of principle, to use interest rates, as they are a transparent and standard instrument. But it is no taboo for us to use the exchange rate if the situation so requires.

But, as I said, we had no broad debate about this. We want to possibly prepare for it. It’s not entirely elementary. It’s something that has to be well planned from all the different angles. And it involves a number of technical details, which may sometimes be crucial, and they definitely were not a subject of debate today.