Transcript of the questions and answers from the press conference

Given all the new information we have and the inflation risks you listed, how likely is it in your opinion – from today’s perspective with the information available – that there will be another interest rate cut? Do you think it’s more likely that the next rate move will be up or down?

We currently view this as a pause, but we’re not ruling anything out for the future. I can’t assess the probabilities, but we are keeping all options open – both continuing with rate cuts and increasing rates – exactly as needed to ensure we fulfil our mandate.

What, in your view, is the ideal neutral key interest rate level that could be maintained over the long term? The market is talking about something close to three per cent. If I’m not mistaken, some members of the Bank Board are talking more about three and a quarter to three and a half per cent. So, what would you consider the hypothetical destination? And while I understand you just said you’re not ruling anything out, when do you think, under current conditions, that this destination could be reached?

Personally, I don’t have such a level. For me, it’s important to keep rates higher than they were on average in the ten years before Covid. But if you are asking me what our estimate of the neutral rate is, it’s roughly a little over three per cent. But that’s still just a model-based estimate – something calculated – and there’s no guarantee that we will follow it or that we will converge to that rate.

I’d like to ask you to elaborate a bit more on the risks stemming from the escalation of trade wars and the possible imposition of tariffs by the United States and potentially reciprocal tariffs in Europe. In the short term, you see this as an upside risk to inflation. However, as you mentioned, there is also the long-term aspect of growth suppression, which, according to some of your colleagues, may have the opposite effect. How do these risks balance in your view over the short and long term?

The biggest inflationary risk isn’t trade wars, but public finance deficits – a loosening of fiscal rules, growth in deficits, extreme fiscal policy impacts and stimuli, which will translate into inflation and cause an increase in long-term interest rates and will then generally slow the economy and crowd out private investment, or rather make private investment more expensive by raising long-term rates.

Trade wars can be one-off events, so prices might rise in the short term – not necessarily all prices, but those of imported goods or goods that use foreign components. So yes, these prices may see a one-off increase. But on the other hand, some other prices might fall, meaning inflation might not rise. Or other prices might not fall, and inflation could rise, but just as a one-off effect.

It’s not the same as a long-term inflationary effect through money supply growth causing inflation over the next two to three years – the period we look ahead to. It could just be a one-off upward effect on prices, relative prices, or the price level.

Of course, an escalation of trade wars could be problematic if it affected public finance deficits, leading to increased deficits, or if central banks loosened monetary policy too much and triggered monetary expansion.

That’s the biggest problem or risk – public finance deficits and excessive monetary easing as a response to trade wars.

I’d also like to follow up on the fiscal effect on monetary policy. It seems Europe has agreed that it wants to invest much more in defence. In nearly all countries, this is seen as increased investment via higher debt, i.e. an additional fiscal impulse. I’d like to ask whether you see it that way and to what extent this plan, which – as you said – is still just on paper, factors into your thinking about how to proceed with Czech monetary policy.

If this plan is not offset by making savings in other sectors or other parts of the budget, it is highly inflationary and dangerous, and it could backfire on Europe. It could cause higher inflation, crowd out private investment and be reflected in rising long-term interest rates. This would in turn make a sound economic recovery more expensive.

So, growth and good economic developments cannot be bought through increased spending, whether we call it spending on defence, healthcare, science or research. I don’t believe in that at all. Japan has proven this to us. So, it must be offset by making savings elsewhere.