Transcript of the questions and answers from the press conference
What has changed in the economy – or your view of the economy – after you warned some two or three months ago about the uncertainty regarding the January repricing? We don’t know the January inflation figure yet. You also warned about core inflation, which could remain at around 3%, or even above that level. In today’s statement, you said you saw the overall balance of risks as inflationary. The koruna is weakening to a weaker level than in the forecast. All of this seems inflationary. So, why did you actually take the larger step? What do you see or expect?
The main reason was that we are confident that we will substantially reduce inflation this year and that the Czech Statistical Office will announce inflation of around 3% in January. When I looked back at the error rate of our forecast, it’s about ±0.5 percentage point in the long run. So, the January inflation figure should be somewhere in the range of 2.5–3.5% according to our forecast. The inflation outlook is linked with that. We are confident that inflation is now inside the tolerance band around our target over the outlook horizon. But it is in the upper half of the band, not the lower one, where I would like to see it. So, a 0.50 percentage point cut in rates is roughly consistent with that.
Did you discuss where you see the equilibrium interest rate? This is linked a little with market expectations, which see rates well below 4% at the year-end. You said the path will probably be slightly higher, but your forecast for next year indicates PRIBOR at 2.6%. This would imply a repo rate of below 3%. Can you say anything about this – how we should understand it?
You know that today’s vote was 6:1. But with regard to longer rates or the final rate – or we can say R* – there is a consensus that it will probably be higher than the forecast expects and higher than we thought before Covid. We will now be talking about this a lot. We will also have a scenario prepared for the next big forecast. In this context, the Bank Board’s expectations are that rates may go down further in the short term. However, we will try to avoid a greater decrease at the longer end of the curve, as I don’t expect rates at the short end to go down as much as the forecast expects.
The koruna has depreciated by almost 2% since the last meeting, which in itself implies a relatively sizeable easing of monetary policy. I would like to ask whether there was a debate today about the effect of the exchange rate on your future decision-making and the effect of the narrowing interest rate differential between CNB rates and Fed and ECB rates, which will probably remain at the current level for several months.
The koruna exchange rate didn’t play a fundamental role in today’s decision, although some of the board members did speak about it. I personally prefer a strong koruna. I delivered a speech about this in Brno at the end of 2022 in which I presented a strong koruna policy. A strong koruna greatly helped us to reduce imported inflation. It was the key factor in actually taming inflation. However, the koruna is simply about exports, foreign direct investment and a strong economy. In the long run, it’s not about what interest rates we have.