Transcript of the questions and answers from the press conference

Two questions. The first one concerns the recent evolution of the koruna exchange rate. Did this play a role in your considerations, as a source of easing of the monetary conditions and as a risk to financial stability? Did it affect the magnitude of the interest rate decrease? And what are your thoughts on the koruna exchange rate variable in the overall mix? The second question relates to the broadening of instruments, specifically government bond purchases. I would like to know - if you discussed this today - how this instrument could be used in practice. Would it be used as an extraordinary market intervention in the event of exceptional volatility, or do you regard it as something which could, during this year's crisis, become a fully fledged part of your monetary policy mix - genuine quantitative easing as we know it from other countries, regular purchases, and so on. Could you give us a hint as to what this instrument would mean to you in practice?

Tomáš Nidetzký, Deputy Governor:
At its meeting today, the Bank Board of course took the evolution of the koruna-euro exchange rate into account in its decision-making. Naturally, depreciation of the koruna means an easing of monetary policy. However, we are aware that depreciation of the koruna may also have adverse effects on the economy. Nevertheless, we decided to reduce interest rates further, which may of course also affect the path of the koruna exchange rate. 

As regards government bond purchases, I would like to point out that an amendment to the Act on the CNB has been in the legislative process since 2016. It has two main pillars. The first is the introduction of credit indicators and the second is open market operations. It has never been the CNB's aim to enter the primary government bond market. We really do view these instruments as financial stability instruments, especially at this time. The CNB's aim is to broaden the range of counterparties and the range of financial instruments we can purchase from those counterparties, as we can currently only purchase government bonds, and we can only purchase them from banks. So much for the second question.

If you could please clarify this - you view it as a financial stability instrument. So does this mean it would be used to react to exceptional volatility, for example, on the bond market, not as a regular and long-term fully fledged monetary policy instrument? Do I understand this correctly?

Tomáš Nidetzký, Deputy Governor:
Yes, it would enable us to provide liquidity not only to the banking sector, which currently has sufficient liquidity, but also to other counterparties, for example pension funds and insurance companies.

Tomáš Holub, Bank Board member:
If I may add to this from my side - as Deputy Governor Nidetzký said, the Act started to be prepared in 2015 or 2016 and is very general. It was never intended specifically to allow for a quantitative easing programme. That's just one specific thing recently taken out of context in the public debate. Rather, the Act aims to harmonise the CNB's operations - in terms of the range of counterparties, instruments and maturities - with what is the norm at the European Central Bank. It doesn't affect the prohibition on monetary financing. It's a long-standing joint legislative effort of the CNB and the Ministry of Finance. So, we can clearly rule out any speculation that it may be an attack on the CNB's independence. There's no danger of anything like that. The amendment is a long-standing joint effort of the Ministry of Finance and the CNB.

I'd like to return to the economic outlook. Based on the forecast update, can you quantify the extent of the expected contraction of the economy? In connection with monetary policy, is it possible, or do the models and preliminary estimates - even though they are uncertain - indicate, that rates could get as low as zero and the introduction of extraordinary monetary policy instruments could be on the table again?

Tomáš Nidetzký, Deputy Governor:
As I said in the opening statement, when we discussed the underlying inputs in the Bank Board today, the data uncertainty is huge - the data are changing basically every day. Nevertheless, looking at the outlook for, say, economic growth, the economy gets into negative territory, with a contraction of 4% for Q2. However, as I said, this is very hard to predict owing to the constantly changing data. What we can predict very well is the direction, and the direction is currently in fact more important than the figures. We can probably all agree that the Czech economy will go into recession this year.

Tomáš Holub, Bank Board member:
With regard to your second question, we are ready - if we conclude that the situation warrants it - to cut interest rates further. It is currently premature to speculate whether we could get as low as the zero lower bound. We must of course take into account what the first question was about, namely the koruna exchange rate. It has substantially eased the overall monetary conditions and is therefore acting in the right direction. The economy will also be supported by countercyclical - and from that perspective welcome - budgetary policy measures and the drop in world prices of oil, which will also act as a positive supply shock for the Czech economy as a net importer of energy. So, this package will allow the economy to start recovering after the quarantine measures are relaxed. Until then, of course, the effect of all the macroeconomic support measures will be limited, because the economy is currently being slowed by the necessary quarantine measures. This means that demand, which these measures can stimulate, cannot manifest itself in the economy in full, but only after the quarantine measures start to be relaxed. This will of course help to prevent the economy from getting mired in a long recession and to overcome the situation to the greatest possible extent and with as few wounds as possible in terms of financial and economic stability.

I would like to ask for further clarification of the legal framework for government bond purchases. Minister of Finance Alena Schillerová said on television that she had agreed this with Governor Jiří Rusnok. She spoke about this - about the CNB buying these bonds - explicitly in the context of the state's current borrowing requirements. So, how are we to understand this? If you had the power to purchase government bonds at this moment, would you do so? Would you consider it appropriate as part of your stabilisation policy?

Tomáš Nidetzký, Deputy Governor:
I'd like to put the record straight regarding this situation. I have already said that the Act on the CNB has been in the legislative process since 2016. The agreement between the Minister and the Governor was that we wanted to use the shortened legislative process to push through just that one part. We didn't want to discuss credit indicators, we wanted to push through the area of government bonds in shortened legislative proceedings, because we saw also from the market reactions that spreads were widening. In the end, I think that that information, and the fact that the government approved the proposal of this part of the amendment to the Act on the CNB, was reflected the following day - and also today - in issues of government bonds. This is probably the best proof of what the enactment of this option for the CNB would mean, because it is having a very stabilising effect on the market, as the entities buying government bonds have some certainty that if they need liquidity, the CNB is able - if the range of counterparties is broadened - to provide that liquidity thanks to the use of government bonds as collateral. That's the whole logic and the whole story. I think this has proven that in the current sensitive financial and capital market situation the markets have reacted to this step very favourably. This was reflected in both issues - yesterday as well as today. 

I have one more question regarding the legislation and the central bank's potential activity in the bond market. The central bank can already enter the market, especially at the shorter end of the curve. In this context, did you consider whether it would be appropriate to be more active there than the central bank routinely is with its standard two-week and three-month repo operations?

Tomáš Holub, Bank Board member:
As regards the current legislation, under Article 28 of the Act on the CNB we can already purchase government bonds from commercial banks, with no restrictions on maturity. This means that if we conclude that we want to conduct quantitative easing, the existing law provides some room for it. However, the room is limited in that such quantitative easing would probably have to be conducted in a narrower way, that is, via purchases from banks. We can also purchase bonds, including government bonds, from other financial institutions under Article 32, but only to steer the money market, and in that context we might argue that this might only concern shorter maturities. In any case, this creates some outdated limitations for a potential quantitative easing policy. But the existing Act is restrictive for us more in other areas. For example, if we decided to make our liquidity-providing repo facility open to non-bank financial institutions in addition to banks, we really cannot go in that direction under the current legal framework. As I said, the Act is very general in order to broaden the range of CNB instruments for crisis situations. We tried to push through the Act in calm times. We argued that those are the right times for preparing legislation for crisis situations. Unfortunately, we didn't succeed, and that was the motive for trying to speed up the legislative process in this specific respect now. There has been no immediate interest in pursuing quantitative easing policy or any other programme so far. At the moment, however, the situation is developing very rapidly and it is prudent to have these instruments at our disposal.