Transcript of the questions and answers from the press conference

On financial markets – not only in the Czech Republic but globally – there has been a marked repricing of interest rates and expectations about future interest rates. At the moment, Czech rates imply that the CNB’s repo rate will be raised at least once over the next three months and then once or twice more by the end of the year. This means that, according to market expectations, the rate should reach 4% by the end of the year. How do you view such market expectations?

Market expectations change significantly. Half a year ago, expectations were rather that we would lower interest rates. So, we look at how we are meeting the inflation target, not at these expectations. And what matters is that the starting position for fighting inflation is far better now – thanks to tight monetary policy – than it was before the outbreak of the war in Ukraine and the shock that triggered the surge in inflation. First, interest rates are higher than inflation. Back then they were below inflation and close to zero. Now we are at 3.5%. So, the level matters. The koruna is stronger. Inflation expectations are anchored. We are acting restrictively on the economy. At the same time, we are monitoring the situation, keeping all options open, and it is important for us that inflation expectations in the Czech economy remain low as well.

I understand your comment that it is currently difficult to predict how the situation in the Middle East will develop. You also touched on the possibility of higher prices for some commodities. But let me ask more specifically: how significant an upside risk to inflation are these high oil and fuel prices and the sudden increase in gas prices that we are seeing even from one day to the next? What are your thoughts on this? How big an impact could it have on the Czech economy?

Higher commodity prices certainly mean higher petrol prices, for example. On the other hand, the starting conditions in terms of inflation are now the lowest in the past ten years and we have tight monetary policy. So, we are dampening the negative effects of this price increase and trying to fight core inflation in the long term – and we will continue to do so. This could offset the negative impact of rising commodity prices. So, we will strive to keep a low‑inflation environment even if a few items become more expensive due to rising oil prices. But we want to prevent persistent inflation across the economy. That is our main objective, and we will make monetary policy decisions at the next meeting in line with that.

I understand that. But so the public can better imagine it – what steps will you take to prevent a high‑inflation environment from emerging here?

We are keeping all options open. If we see core inflation rising, or its momentum increasing, or if we see a risk of higher inflation, then we will raise interest rates. Conversely, if we see a negative impact on the economy prevailing, with the economy heading towards stagflation or deflation, then we may return to a different debate. But for now, we are more in hawkish mode, so we are not underestimating anything and our policy is already tight. The mere fact that we did not lower rates as much as some were previously saying shows the Bank Board’s determination to ensure low inflation in the Czech Republic over the long term. At 3.5%, the interest rate level is significantly high compared with historical values. Remember that for ten years the rate was around zero and below inflation. The environment is different now than it was before the inflation shock. But we truly are not underestimating anything. We are monitoring the situation closely, and we will have new analyses available, which we will publish openly and transparently.

Regarding today’s discussion, did you talk through any potential developments that could tilt the decision one way or the other? I am especially interested in how much you considered the possibility that rates would need to be raised and under what circumstances that might happen.

What is important is to monitor the flow of money in the economy – to look at core inflation and the impacts on core inflation, and to ensure that any negative shock due to rising commodity prices and resulting higher prices of some items is not offset by new credit creation or further deficit financing by the state. In other words, we must prevent an acceleration in money and credit flows, as that would mean higher inflation in the future. These are the crucial elements we want to prevent. That is why we are remaining strict and keeping our rate above inflation.