Having lifted the exchange rate cap on the koruna after more than three years in 2017, the governor of the Czech National Bank talks to Stefanie Linhardt about his expectations for the year ahead.

Jiri Rusnok

Q: In 2017 you ended the koruna’s exchange rate commitment and successfully lifted the cap without causing any major market fluctuation. What can be expected in 2018?

A: Inflation targeting, which the Czech National Bank [CNB] introduced 20 years ago, remains the key pillar of our monetary policy. After ending the exchange rate commitment in April 2017, we started the process of normalising monetary policy, i.e. returning interest rates to their usual or pre-crisis levels. We raised interest rates in 2017, and we will continue to do so.

Another indicator that things are gradually getting back to normal is that this year we will start to publish the exchange rate path consistent with our forecast again, as we used to do before the exchange rate commitment.

I regard the transparency of our monetary policy as one of its most important features. As in the case of the exit from the exchange rate commitment, we aim to give markets, firms and the public as much information as possible about our likely future actions, thus minimising the chance of surprise. Overall, inflation targeting provides a very important anchor for our economy and is one of the key elements of its macroeconomic stability.

Q: Last year you repeatedly warned that risks in the property market were growing due to cheap lending. What is your assessment of financial stability in the banking sector?

A: In general, the CNB’s financial stability framework is based on capital buffers held by banks. A capital conservation buffer in the full amount of 2.5% of core equity Tier 1 capital [CET1] has been required since July 2014. The risks associated with the existence of systemically important banks are addressed by a systemic risk buffer, introduced in November 2014. This buffer is currently applied to five institutions, with rates ranging from 1% to 3% of CET1.

The CNB also uses a countercyclical capital buffer to keep the banking sector resilient to the potential after-effects of credit booms. The CNB decided to increase the countercyclical capital buffer rate from 0.5% to 1% in June 2017 with effect from July 1, 2018 and raised it to 1.25% from January 1, 2019 in December. The countercyclical capital buffer rate will continue to rise next year in response to continued high credit growth in an environment of eased lending standards and growing systemic risks relating mainly to the credit financing of property purchases.

An amended and more stringent recommendation for banks has been in force since April in reaction to property market and mortgage loan developments. It mainly concerns loan-to-value ratios and, newly, also rules for the calculation of the debt-to-income and debt service-to-income ratios to limit room for circumvention of our recommendations. Banks are mostly complying with our recommendation, albeit with a delay. This measure has helped stem the growth in new mortgage loans since the second quarter of 2017.

Another important part of our macroprudential framework is a set of stress tests, which we use to evaluate the resilience of banks, insurance companies and pension funds to risks arising from potential highly adverse developments. In the case of banks, we have strengthened the link between the stress test results and the requirements placed on individual institutions in the supervisory review and evaluation process. In my opinion, close co-operation between all departments responsible for financial market regulation and supervision is a key element of our approach to financial stability. 

Q: What do you see as the biggest challenges in the near term?

A: Right now, I see no major risks to future economic developments. Our economic growth is about 5% and EU economic growth has also accelerated recently. Although it will probably slow somewhat in the quarters ahead, I think the upswing will continue into 2019. However, the important factor for our monetary policy, in my opinion, is when and at what pace the European Central Bank [ECB] will start raising its interest rates. Our ability to influence the domestic economy and keep inflation at our target will partly depend on that.

I consider the limited ability of the euro area to find an effective way of dealing with its overall functioning to be a very important and long-standing problem. Although this issue now appears to be less acute thanks to the current upswing, I regard the high government debt levels in some member states as worrying. When the ECB starts raising interest rates, accompanied by a cyclical slowdown in these countries, debt will become a significant burden on public finances and future economic prosperity. The incomplete and not entirely functional institutional framework of the euro area is the biggest challenge facing Europe. Given the close links between our economy and the euro area, this problem also concerns us.

PLEASE ENTER YOUR DETAILS TO WATCH THIS VIDEO

All fields are mandatory

The Banker is a service from the Financial Times. The Financial Times Ltd takes your privacy seriously.

Choose how you want us to contact you.

Invites and Offers from The Banker

Receive exclusive personalised event invitations, carefully curated offers and promotions from The Banker



For more information about how we use your data, please refer to our privacy and cookie policies.

Terms and conditions

Join our community

The Banker on Twitter