price stability and financial stability in uncertain times...jan 15, 2020  · item is mortgages •...

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

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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

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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

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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%)

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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

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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

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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

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Thank you for your attention.