Transcript of the questions and answers from the press conference
Could you please explain the fact that today’s decision and the forecast sound very hawkish, while the comments made by your colleagues and yourself in recent weeks – at a time when you probably already had some idea of what the forecast would look like – sounded more dovish. You spoke of fine-tuning and potential cosmetic rate increases. Could you please just explain what has shifted in your thinking over the last few weeks? Did the forecast today contain any new information you didn’t have before? Additionally, could you please explain the reason for the de facto extension of the horizon – the smoothing of the curve, if that is how you perceive it – in a situation where inflation expectations of non-financial corporations are rising very rapidly and are at about 6% or 7%, depending on whether you look at the one-year or three-year horizon. Is the postponement of hitting the inflation target fuelling inflation expectations further, given that we have been above the inflation target for about three years, or more than three years? What are your reasons for that?
Everything is very relative today, you know, and things are changing so often. So it’s very difficult to assess to what extent the comments made by my colleagues and perhaps also myself in recent weeks have been dovish or not. Of course, we base our decisions on underlying documents prepared by our colleagues in the Monetary Department above all. But of course we also have input from advisers and the Financial Stability Department and we consult with the Financial Markets Department.
Unfortunately, the situation as we see it is escalating. We can see that the risks in the European – and to some extent also global – economy are not fading. Quite the reverse, some are even materialising. It is clear we are now at a higher inflation level than we estimated in the previous forecast in January, substantially higher. We said at the time that we would be somewhere around 10% or 11% – slightly in double figures – in the peak months in terms of annual inflation. Today we are saying that we will unfortunately be around 14% or 15%. That is not a negligible change.
Although we can see and confirm that the additional inflation today is due almost solely to external cost shocks, of course we can’t pretend that this is not feeding through to the entire economic vertical in all areas. We cannot ignore it from the monetary policy perspective.
Before the war we said that roughly one-half of the inflation factors were domestic, mostly long-term demand ones, and roughly the other half were supply factors related to post-covid disruptions and already at that time emerging growth in prices of energy and some commodities.
Today we know that new factors have added significantly to the external cost pressures side, but that does not mean there are no domestic ones. We can see a relatively fast pass-through of the external pressures to domestic price agreements and arrangements. And that is not automatic. One thing is that costs are rising at a certain stage of the value chain, at a certain stage of processing and trade. Another thing is how much of the costs the customer – the demand side – is able to absorb. It’s always about a balance that must be found between supply and demand. And we can see that demand is still able to accept a relatively strong pass-through to domestic inflation.
So, if we want to influence the anchoring of inflation expectations, which you spoke about and which we realise are under huge pressure, we basically cannot abandon further rate hikes. I think that in such case we would completely abandon the mandate of the Czech National Bank as the guardian of price stability.
At the same time, as I partly quoted in the statement, we can see that the shock to the economy caused by the huge increases in prices of energy commodities in particular will feed through to a negative demand shock. And it is clear that a marked decrease in consumption – and demand in general – will follow at some point.
As I presented, we have significantly lowered our forecast for GDP growth to less than 1% – 0.8%, 0.9%. We perceive that, of course. On the other hand, it is clear that we are still the economy with the lowest unemployment rate in Europe. It is still facing labour shortages almost across the board, with a still huge number of job vacancies. So, it’s clear that we are facing no overcooling of the economy yet. In our opinion, there is a risk of overcooling, but it certainly involves a return to a new equilibrium. And we are here to maintain equilibrium, balancing out swings in the business and financial cycle.
So, it may of course look a bit complicated, but it’s simply a compromise between strong inflation pressures, regardless of their origin, i.e. regardless of whether they are from the external environment, which is now certainly dominant, or are already the result of pass-through to the subsequent stages of the vertical in the domestic economy.
But that is why we decided to increase rates much less than signalled by the modelling system, i.e. less than the model would if it were to act autonomously, which of course is not possible at turning points like this. And even the model includes a number of non-automatic expert decisions. So, it’s a compromise between these two tendencies and pressures. I don’t want to assess to what extent this is in line with what was said before the meeting. That’s always in a certain context. In this case we arrived at this majority conclusion.
Was more active use of the koruna exchange rate as a new monetary policy instrument discussed at today’s meeting? Did you discuss more specifically the option of selling a certain amount of reserves regardless of exchange rate movements?
That debate did indeed take place. It is now taking place more frequently. That’s perhaps natural in our current situation. We did not decide to use the exchange rate as a specific instrument. We certainly don’t regard that as necessary now. It’s a problematic issue on the side of the market where we currently are.
We decided already at the previous meeting to increase sales of income on the international reserves, and today we made another increase. So, the programme of sales of income on the international reserves continues.
We had no significant debate on the exchange rate in the sense of there being an immediate specific level we would like to influence in this way. We don’t want to primarily influence the koruna exchange rate in this way. But at the same time we are aware that it does have an effect on the exchange rate, of course.
Perhaps just to clarify the increase in the sales of income by comparison with the levels seen in January and February. Are we talking about, say, amounts several times as high? I know you can’t tell me the amounts, but are we talking about, say, a 50% increase or a 500% one?
I’m sure you’ll understand if I don’t give you an answer. It still holds true that we publish these things ex post, so the data will become available in a few weeks, after the end of the relevant period.
Regarding the two scenarios you mentioned today, as that is sort of a new thing, is the “more distant” scenario something the Bank Board perhaps thought could also be kept for future decisions? Or is it something that just reacts to the current situation and will be abandoned again and you’ll return to just one scenario?
Our colleagues from the Monetary Department quite often use various simulations and monetary policy exercises, which are basically types of scenarios, to capture the current context, the situation at a specific time. Today it was more colourful, because times are exceptionally uncertain. There’s really not much we can work with regarding the future, as there are so many key factors which may develop in highly different ways that it calls for such a broader range of scenarios. That’s my first remark.
The second remark is that the scenario showing what happens if the targeting horizon of monetary policy transmission is shifted is based on a very logical idea. It says that the external cost pressures are so high already, given the existing growth in energy and commodity prices – they can be seen very well in the industrial producer price index, which, as you know, has long been in double figures in our economy and in the euro area – so it’s clear that the ambition to increase rates enough to get us to the target at the standard one-year horizon is in fact possible only at the cost of extreme interest rate hikes, which in turn have other consequences we would have to take into account if we opted for them.
So, the idea is that we will temporarily – and I hope only in this one-off case – put up with the horizon being shifted, say, by one or two quarters. That will enable us to increase rates slightly less. We therefore took this scenario partially into account. But it shouldn’t be any rule for the future. I think that would be a change in paradigm, in the set-up of our inflation targeting. We haven’t got that far, and I hope we won’t.