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QUO VADIS 2020
Price Stability and Financial Stability
in Uncertain Times
Tomáš Nidetzký
Deputy Governor
Czech National Bank
Prague January 15, 2020
2
PRICE STABILITY
3
Flexible Inflation Targeting
• Point target and symmetric tolerance band
• 43 months below 1% and 11 months above 3% since 2009
-2
0
2
4
6
8
10
12
14
1/98 1/00 1/02 1/04 1/06 1/08 1/10 1/12 1/14 1/16 1/18 1/20
headline inflation
net inflation
headline inflation targets
net inflation targets
Forward Looking Approach
• Forward-looking
• Always 2% on the horizon
• Confidence intervals reflect risks and uncertainties
• Risks are measurable
• Uncertainties are about sentiment
4
Headline inflation forecast
(year on year in %)
0
1
2
3
4
5
IV/17I/18 II III IV I/19 II III IV I/20 II III IV I/21 II
90% 70% 50% 30% confidence interval
Inflation target
Monetary policy
horizon
Structure of Inflation Matters
• Driven by core inflation
• Volatile food and fuel prices
• Effects of changes to indirect taxes
• Housing prices as part of inflation
5
Structure of inflation
(annual percentage changes; contributions in p. p.)
-1.0
-0.5
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
1/18 4 7 10 1/19 4 7 10
Core inflation Food prices
Administered prices Fuel prices
Indirect taxes Headline inflation
Deviations from inflation forecasts
(in p. p.)
-0.80
-0.60
-0.40
-0.20
0.00
0.20
0.40
0.60
0.80
1/18 4 7 10 1/19 4 7 10
Solid Domestic Economic Growth
• External slowdown so
far not very visible in
the domestic economy
• Continued robust
growth in household
consumption
• Private and government
investments are
crucial
• Economic data signal
continued solid
economic growth,
albeit slightly lower
6
Annual GDP growth structure
(annual percentage changes; contributions in
percentage points; seasonally adjusted)
-4
-2
0
2
4
6
8
I/15 I/16 I/17 I/18 I/19 I/20 I/21
Change in inventories
Government consumption
Gross fix. capital formation
Net exports
Household consumption
Gross domestic product
Euro Area Outlook
• Economic slowdown with
downside risks
• Effective euro area
outlook: +0.9% in 2020
+1.4% in 2021
• Development in Germany
is crucial
• Direct and indirect impacts
through re-exports
• Risks and uncertainties:
US trade policy, Chinese
slowdown, Brexit, Iran,
geopolitics
7
Euro area GDP growth outlook
(annual percentage changes; contributions in
percentage points to growth in the effective euro area;
seasonally adjusted; CNB calculation)
-1
0
1
2
3
4
I/15 I/16 I/17 I/18 I/19 I/20 I/21
Germany Slovakia
France Italy
Spain Other
Effective euro area
FINANCIAL STABILITY
8
Banks Dominate Financial Market
• Bank assets amount to CZK
7.200 bn (EUR 300 bn)
• Bank assets/GDP ratio is
slightly over 150%
• 24 banks and 25 foreign
branches
(EU, US, Japan, China)
• Czech private banks
represent just 7% of the
banking sector assets
9
Banks: 80,0%
Credit unions: 0,2%
Management companies and
investment funds: 3,6%
Pension management
companies and funds: 5,3%
Payment institutions and
electronic money
institutions: 0,5%
Insurance companies:
5,4%
Investment firms: 0,3%
Financial corporations engaged in
lending: 4,7%
Banking Sector Performance
• Well-capitalized: capital ratio = 20%
• Ample liquidity: L/D ratio = 74%
• Growing loans: growth y/y = 7.2%
• Highly profitable: ROE = 18%
ROA = 1.1%
• Risks under control: NPL = 3.2%
coverage ratio = 68%
*end of 2018
10
Macroprudential Policy
• Macroprudential policy tools
can mitigate some of the risks:
Capital buffers in banks
Tools for residential real estate risks
× Tools for commercial real estate and
other asset classes’ risks untested or
non-existent
× Tools for life insurance, pension and
investment funds at initial stages of
development
• Czech Republic:
• Overall capital ratio 19.6%
• Capital buffers average 5.9%
• Voluntary capital surplus in
average 4%
• CCyB 2% since 7/2020 (14 countries
in Europe, announced average 1.3%)
11
Source: CNB
Note: * Expected upper limit, but actual values may be higher.
18 %
16 %
14 %
12 %
10 %
8 %
6 %
4 %
2 %
0 %
buffers
individual
requirement
under SREP
statutory
minimum
minimum(at least additional T1)
minimum
(CET1)
pillar 2
minimum
(at least T2)
countercyclical
buffer
(CET1)
systemic risk
buffer
(CET1)
conservation
buffer
(CET1)
2.5 %*
3 %*
2.5 %
2 %*
2 %
1.5 %
4.5 %
Tools Available vs. Tools in Use
• In many countries banks keep more
deposits than they provide loans
• A very sizable and cycle-dependent
item is mortgages
• Czech Republic:
• Apartment prices overvalued by 15%
Max LTV set to 80%, exceptionally 90%
Importance of “cash-flow”: max DTI 9
& DSTI 45%
• Europe:
• LTV limit active in 20 countries
• LTI/DTI/DSTI limit active in 13
countries
12
Loan-to-deposit ratio (in %)
0% 50% 100% 150% 200% 250% 300%
Denmark
Sweden
Finland
Luxembourg
Ireland
Netherlands
Greece
Slovakia
Austria
France
Spain
Estonia
Germany
Portugal
Lithuania
Italy
Poland
Malta
Latvia
Romania
Cyprus
Slovenia
Czechia
Croatia
Belgium
Bulgaria
Monetary and Macroprudential Policies
• … have their own goals and need separate
tools to fulfill them
• Ideal if monetary and macroprudential policies
are harmonized: not substitutes, but
complements
• Monetary policy: lower agility if risks and
uncertainties on the rise
• Macroprudential policy: reacts proactively to
identified risks and estimates of their potential
impacts
13
More information available at www.cnb.cz
Highly recommended publications:
• Inflation report
• Financial stability report
• Analyses of the Czech Republic's current economic alignment with the euro area
• Global economic outlook
14
Thank you for your attention.