Governor of the year: Aleš Michl

Aleš Michl is not the most traditional central bank governor. He is prone to speak his mind, sometimes without consulting with key staff at the Czech National Bank. He holds ‘unorthodox’ views compared with many of his peers – for example, he believes money supply is an important consideration for monetary policy-making. He was prepared to disregard interest rate advice generated by the CNB’s core economic model, instead using qualitative judgement and high-frequency data to set monetary policy. He favours balancing the CNB’s books, concerned that central bank losses mirror unworked-for profits by commercial banks. He has utilised unorthodox communication, notably by shooting a home-made video with a ketchup bottle to demonstrate how a supply-side constrained economy works and posted it on his X account. Most recently, he has posited the idea of adding bitcoin to the CNB’s foreign exchange reserves, causing a stir among many of his peers in the European central banking community.

Like his central banking peers, however, Michl has a laser-focus on his primary objective: keeping prices stable. In the case of the CNB, this means maintaining an inflation target at an annual consumer price index growth of 2% with a tolerance of one percentage point in either direction.

When Michl took office in July 2022, inflation in the Czech Republic was 17.5% – one of the highest levels in Europe. The key central bank interest rate stood at 7%. Michl immediately took the bold step publicly to pledge to reduce inflation to 2% within two years. It was a move that he recognised could have damaged the credibility of the CNB, had it been unsuccessful. Michl tells Central Banking, however, that he considered that risk “to be very small”.

Michl has a laser-focus on his primary objective: keeping prices stable. In the case of the CNB, this means maintaining an inflation target at an annual consumer price index growth of 2% with a tolerance of one percentage point in either direction

Perhaps more surprisingly, given his strong commitment to disinflation, Michl did not raise interest rates significantly, despite experts at the CNB – using outputs from the central bank’s upgraded dynamic stochastic general equilibrium model, known as g3+ – urging rates to rise incrementally to 11% to tackle inflation expectations. Instead, the board under Michl’s leadership chose to keep rates steady at 7%. Michl told Central Banking that CNB studies at the time indicated there was a declining trend in demand in the country and the savings rate of households was high. “As a result, instead of implementing another rate hike, we committed to maintaining rates ‘higher for longer’ at 7%,” he said.

Use of the expression ‘higher for longer’ was critical in terms of signalling. The idea was that rates would remain restrictive for as long as necessary, but they would also be less volatile than if they were raised to 11% and then cut back again in a relatively short period (as the DSGE model outputs had proposed). Michl was convinced that interest rates were already restrictive and that raising them further would have little effect on prices. He and his colleagues, however, kept a close eye on prices by reviewing an index Michl had helped to build (the Rushin index, named after Alois Rašín, a prominent economist and politician from Czechoslovakia’s founding era) of high-frequency indications that provided insights on inflation. The CNB found that the country’s inflation was driven primarily by the cost of importing energy and goods. “Based on this indicator, we were able to determine that demand in the economy remained muted during 2023,” Michl said.

This meant raising rates further would have a limited ability to restrict inflation. “In a small, open economy like ours, higher interest rates can neither lower European energy prices nor solve the problem of global supply chains,” Michl told delegates attending the Central Banking Summer Meetings in June 2024. The DSGE model also did not pick up that many companies had started to borrow in euros instead of koruna due to the wide interest rate differentials – euro rates were much lower than Czech rates – and a further increase in spreads would have only reinforced the trend.

In a small, open economy like ours, higher interest rates can neither lower European energy prices nor solve the problem of global supply chains

Aleš Michl, Czech National Bank

While signalling rates would stay high as long as necessary, the CNB also introduced a new strategy, Policy for a strong koruna, to bolster its currency. This was critical to ensure import prices for materials did not rise even further due to a depreciating FX rate. The CNB, which has FX reserves of around 40% of GDP, had started intervening in the FX markets from May 2022. But this form of intervention stopped soon after Michl took over as governor and the CNB instead resumed its programme of selling part of its income earned on its international reserves. In its 2023 annual report, the CNB said it had sold €1.2 billion ($1.3 billion) by the end of that year. Instead, Michl favoured continued messaging about the need for tight monetary and fiscal policy while urging for long-term growth action by the government to bolster the koruna. This ultimately resulted in the Czech currency reaching a new high against the euro in 2023 (although it has subsequently declined). The strength of the currency at the time resulted in the cost of imports declining in relative terms, playing an important role in helping to cool overall prices in the Czech Republic.

Consistent communications

The disinflationary shift was assisted by Michl communicating the CNB’s plans in a consistent manner. Notably, he gave speeches to explain how the CNB would get inflation back to target, including the series ‘The road to the target, The road to the target II and The road to the target III’. He also conducted interviews with a popular national newspaper as well as markets-focused media outlets to reinforce the CNB’s message to all stakeholders.

The Czech governor also embraced social media channels, including Instagram, Facebook and X, where he deployed his ketchup bottle metaphor: initially a lot of effort is made to get hold of goods affected by Covid-19 lockdowns (bashing the top of the ketchup bottle) with no obvious positive result. Then, as supply chain problems were resolved, there was a sudden glut of goods (too much ketchup coming out in one go) before an even flow is established. “That’s not typical of a conservative banker,” said Michl. “But neither was the overall economic situation.”

While the CNB was not particularly worried about demand-driven inflation, Michl was keen to ensure it did not take root. As a result, the central bank took consistent action to dampen inflation expectations. The governor constantly warned about wage restraint and froze the salaries of board members in 2023 – the wider staff at the central bank got 4.5% rises versus inflation at 10.7%. He also cut the number of positions at the CNB by 5.1% and the number of senior executives at one level below the board from 17 to 14. “We needed to lead by example, demonstrating the same discipline of ourselves that we were asking of others,” Michl told Central Banking.

This combination of efforts alongside the easing of exceptionally high global prices for com4%modities and goods resulted in inflation falling sharply in the Czech Republic. Given these conditions, the CNB started to ease rates as of December 2023, reducing its policy rate by a cumulative 300 basis points to 4% by November 2024, with a further cut in February this year taking rates to 3.75%.

By February 2024 – and within Michl’s two-year time-period – inflation was back to 2%, making the CNB one of the first central banks in Europe to achieve this milestone. Since then, inflation has stayed largely within the CNB’s tolerance band and, as of February 2025, stood at 2.7% – higher that Michl would like, primarily due to volatile food prices and base effects. The CNB is still seeking to steer prices downwards. “With inflation expectations broadly anchored and a negative output gap, a simple Taylor rule suggests that monetary policy is still tight,” the IMF said in its latest article IV report.

Flawed models

Michl also undertook a review of the CNB’s modelling approach. He said he ignored the results of the central bank’s g3+ model during the period of runaway inflation for three main reasons: DSGE models tend to underestimate the role of money, which is why he says they failed to predict the inflation surge in the first place. The model failed to pick up outside influences, such as companies borrowing in euros due to lower rates; as the ECB began tightening, borrowing costs for these companies rose, slowing demand. And he was sceptical about DSGE models being designed to function around a steady-state equilibrium. “The model assumes high inflation expectations would boost consumption in anticipation of rising prices. However, in reality, real consumption was falling sharply as inflation increased,” Michl told Central Banking. “Additionally, our team’s calculations showed inflation expectations in our country were adaptive rather than forward-looking, contrary to the DSGE model’s assumptions.”

We needed to lead by example, demonstrating the same discipline of ourselves that we were asking of others

Aleš Michl, Czech National Bank

The results of the board’s commissioned independent reviews were published in November 2024. Each review made somewhat different recommendations on the route ahead. One, authored by Roman Šustek, proposed retaining and upgrading the existing g3+ model, supplemented with an expanded set of satellite models. Another, by John Muellbauer, proposed scrapping g3+ and adopting a semi-structural model, potentially supported by an agent-based model. The third, by Karel Brůna and Martin Mandel, steered somewhere between the other two, recommending at least a temporary period where an updated version of g3+ operates alongside a new semi-structural model.

Speaking in November, Michl said the assessments recommended “we reduce our reliance on a single model, explore alternatives to DSGE models and expand economic research within the bank”. The CNB has since restructured its research department and is now developing a semi-structural model to trial alongside g3+. In time, the CNB’s efforts to improve its modelling could result in the bank returning to forecast-based inflation targeting, as and when ‘normal’ economic conditions return. This, according to the IMF, may reduce FX volatility that it attributes to the CNB’s shift to data-dependent monetary policy-setting.

Balancing the books

Michl inherited the largest cumulative loss in the CNB’s history – €16 billion, or 7% of GDP. While negative equity does not directly constrain monetary policy, the CNB’s board has taken steps to strengthen the central bank’s financial position.

On the liabilities side, required minimum reserves were increased and ceased to accrue interest, thus lowering the costs of monetary policy. Michl told Central Banking he was not concerned this may impede bank capital accumulation, restrict their credit provision or potentially reduce the predictability of monetary policy transmission. “The real risks lie elsewhere. Currently, our commercial banks earn about 40% of their interest income from the central bank. The risk is that banks are becoming complacent, lending less to the productive sector and focusing instead on government bonds and real estate lending. This shift could lead to asset price bubbles and, in the long run, it may slow potential growth and contribute to higher inflation,” Michl said.

On the asset side, the CNB’s FX reserves now stand at around $150 billion. The board increased the proportion of the CNB’s gold holdings from eight tonnes to 46 tonnes, with 100 tonnes targeted by 2028. The CNB is also nearly doubling its equity holdings to 30%. The aim is to bolster returns over time while diversifying reserves and reducing volatility. As a long-term investor, Michl says he is less concerned about market timing, despite gold and many US equity prices being close to all-time heights, and more about diversification and income optimisation.

The CNB’s portfolio will more closely resemble those of Switzerland and Israel – early diversification pioneers – in future. But Michl surprised his peers – and some of the CNB’s staff – when he said the CNB may consider investing up to €7 billion in bitcoin in a bid to improve returns and further diversify the CNB’s portfolio. Fellow central bankers immediately spoke out about some of their ethical concerns, as bitcoin is often used to facilitate illegal activities, its mining requires significant amounts of energy, and it is not a currency supported by a central bank. There are also concerns about the structure of the market and whether its price movement really is uncorrelated with those of other reserve assets.

Michl stressed that his proposal involves studying the possibility of creating a bitcoin test portfolio. “This step is motivated by a desire to learn about and try out this highly risky alternative asset,” Michl tells Central Banking, pointing out the volatile nature of bitcoin’s price means holdings could be worth “either zero or a huge amount” and should only be considered by professional investors who are aware of all the risks. “Based on the results of the analysis, the bank board will then decide how to proceed further. No changes will be implemented in this area until then.”

Michl has demonstrated exceptional determination to stabilise inflation and secure the integrity of money in the Czech Republic. His style may be unconventional, but his judgement has proven prescient

Focus on stability

The CNB under Michl has also demonstrated its commitment to financial stability. After Russia’s invasion of Ukraine in 2022, there was a run on the Czech operations of Sberbank, which had approximately 120,000 clients. The CNB participated as a member of the creditors’ committee and oversaw the process. In 2024, the insolvency proceedings were completed, with creditors recovering 95% of their funds.

In addition, the CNB’s macro-prudential framework was recalibrated in response to evolving financial risks. In June 2024, the CNB lowered the countercyclical capital buffer by 50bp to 1.25% as cyclical financial risks were viewed as subsiding. However, it also introduced a general systemic risk buffer at 0.5% effective from January 2025, in response to rising structural risks. Furthermore, in 2024, the last major bank joined the CNB’s instant payment system. This allows immediate payments, with recipients seeing the transferred funds in their accounts within seconds.

And Michl commissioned the development of a new visitors’ centre, which the CNB says welcomed 91,000 visitors in the past year, mainly schoolchildren. In it, he initiated the construction of a replica of the office of Rašín, the first Czechoslovak minister of finance and the founder of the independent currency. He also has historical emblems, removed by the Nazi regime, restored to the CNB’s building.

Overall, Michl has demonstrated exceptional determination to stabilise inflation and secure the integrity of money in the Czech Republic. His style may be unconventional, but his judgement has proven prescient in many areas, helping to strengthen the Czech economy while positioning the CNB to face the challenges of the future.

The Central Banking Awards 2025 were written by Christopher Jeffery, Daniel Hinge, Daniel Blackburn, Joasia Popowicz, Riley Steward, Jimmy Choi, Levente Koroes, Thomas Chow and Blake Evans-Pritchard.