Ales Michel approaches economic challenges much differently than his predecessors and counterparts in other countries, and has achieved impressive results.
Global Finance: You are now halfway through your six-year term as Governor of the Czech National Bank (CNB), and inflation has fallen from 17.5% to about 2.5% today. How did you achieve this?
Alice Michelle: We have changed not only the strategy, but also the philosophy. The previous council had kept interest rates at zero for too long, doubled the money supply by weakening the corona, and then suddenly raised interest rates when inflation had already arrived. Instead of sharp, volatile moves, we kept interest rates higher for longer. We added a strong anti-coronavirus policy, making imports of energy and raw materials cheaper. This combination has led to the tightest monetary conditions in 25 years. This led to lower money creation, slower demand, and finally lower inflation. Sometimes less is more important – stability, patience and reliability. The new philosophy is not to once again create long-term inflation by setting interest rates at zero or printing money – this has always backfired in history.
GF: Your strategy of not raising interest rates significantly to limit inflation is different from the way countries like Türkiye have combated inflation. Is this because the Czech economy is different, or are there also underlying philosophical reasons?
Michelle: Monetary policy should be consistent and credible, not experimental. One experiment is to keep interest rates at zero for more than 10 years – negative rates even in real terms – to create inflation, and then when inflation comes, we think it can be quickly overcome by sudden spikes. This was the mistake of the past and we must acknowledge it. I prefer to keep prices higher for longer and communicate clearly. The goal is low inflation.
GF: The global economy has changed dramatically in recent years. What changes affected the Czech Republic the most?
Michelle: The world is constantly changing, but humanity keeps repeating the same mistakes. We must remember that too much debt and cheap money lead to high inflation rates. We can never predict exactly what will change the world. But it is easier to see that countries, households, entrepreneurs and companies that maintain savings, wealth and reserves in good times, rather than piles of debt, are better able to absorb shocks when disaster strikes.
GF: The Chinese central bank’s foreign exchange reserves currently stand at around €135 billion. During your tenure, it has increased its gold holdings from around eight tonnes to 65 tonnes, with plans to increase this to 100 tonnes by 2028. It has doubled its equity holdings to around 25%. What is the rationale behind this diversification?
Michelle: In the past, we have experienced significant cumulative loss resulting from improper management of assets and liabilities. Our assets – our foreign exchange reserves – have achieved low expected returns compared to the cost of our liabilities. We have changed this significantly. We have raised the expected long-term return on our assets, especially reserves. We have more stocks and gold. At the same time, we succeeded in reducing liability costs – we increased the minimum reserves that banks must hold, and stopped paying interest on them. We have removed the reason. The past two years have been profitable. But we can’t expect profits every year. There will be years when the Chinese central bank will suffer a loss, perhaps 2025 or another year. The key here is that our assets are now structured to produce a higher expected return over the long term than the expected cost of our liabilities.
GF: Do you expect to join the Eurozone at any time?
Michelle: Not in the near future. Corona is our anchor. We have helped fight inflation by keeping imports cheaper. There are questions far more important than the euro. The Czech National Bank will soon become an institution that uses artificial intelligence to better supervise the financial market. We also study blockchain technologies, as they have become an important part of modern finance and payment systems. It will use real-time data and machine learning to predict crises. In its supervisory process, the National Central Bank will systematically use artificial intelligence not only for analysis, but also for automatic decision-making in selected areas.
The next generation of bankers will think very differently – with real-time data and with algorithms and systems that will be better partners in decision-making than our previous models. Vision is a bank that helps people dream about the future without fear of inflation. A bank that ensures financial stability by working with data and technology. It will also be an organization where employee ethics prevail. The culture within an organization is crucial to me. All of this is more important than adopting the euro.
