photo: cnb.cz
Interview with Aleš Michl, Governor of the CNB
Michaela Nováková (ČT24 27. 6. 2024, Interview ČT24)
Selected quotes - CNB Media Department
Satisfaction with first two years in office
When I took over as Governor in mid-2022, inflation was eighteen per cent, and in February and March this year it was two per cent year-on-year, right on our target. So, yes, I am satisfied, or I should add that we are satisfied because we are one team as the Czech National Bank and it is a success for all employees.
Is inflation won?
No, it's not won. The future will judge us by our long-term performance, not by the short-term result of a significant reduction in inflation. The struggle will continue, and that is why we say and want to tell the public to forget the ultra-low interest rates that were here in the decade before the covide. The average interest rate here was 0.6 per cent. That was a rate that encouraged borrowing and inflation.
Reducing interest rates
We have inflation on target, though not exactly on target. The latest annual figure is 2.6 per cent. That is why we are on our guard, we do not want inflation to run again. On our thinking horizon, which is a year, a year and a half ahead, we see inflation somewhere around two per cent. But at the same time, we say that the growth in service prices is further elevated and this is also the case elsewhere in the world. The amount of money in the economy is still high, the liquidity of the banking sector is high, and so are the deficits of public finances. That is why rates are going down, but not to the level they used to be.
Probability of another 0.5 percentage point jump in the base rate
We are keeping all options open because our mandate is to deliver price stability in the country and not to repeat the period of 18% inflation here. So we cannot rule anything out, but at the moment it is more likely that we will slow down or stop the fall in interest rates.
Normal base rate
The normal interest rate should be around three, three and a half percent in nominal terms. Significantly higher than the average of 0.6 per cent in the decade before the covide. It's a purely theoretical figure that I can rely on. It is a measure at which the economy should be in equilibrium, should continue to thrive, and at the same time inflation should be on target.
On household spending and saving
Alois Rašín, the First Republic's finance minister, one of the men who helped establish the independent Czechoslovak Republic, said "work and save". And my vision is similar. Let's save, let's work and let's not go back to the same period as before, when the price of money was zero and everyone was spending, taking out their first second mortgage or their first second consumer loans. And especially before the price of money was below inflation, so savings were losing value. The long-term vision of the Czech National Bank is for rates to be slightly higher than inflation. Those who save should be rewarded accordingly.
Wage bargaining in the economy, the CNB sets an example
At the central bank, we want to set an example, which is why the average wage rose by 4.5 percent this year. We consider this to be a reasonable increase. Of course, those who have fantastic performance, fantastic productivity, fantastic work results, should increase their salaries more. It was the same in our bank. But on average, for the company it should be about that 4.5 per cent. The same in the public sector, so that salaries do not fall off the chain and so that we can really put a stop to inflation.
Fighting inflation and a strong crown
We are not targeting the exchange rate of the koruna, but the new approach that we brought after our appointment was that we stabilised interest rates and appealed for a strong koruna. Which has been successful. And that was purely because most of that (high) inflation was costly, imported. And the best we could do to combat that was to have a strong crown. That made imports cheaper and therefore reduced inflation. That was successful. During our tenure, in the spring of 2023, the koruna was at its strongest level in history. We don't comment much on the exchange rate at the moment. But of course, the stronger it is, the better.
Two years as Governor
It was a period when we rationalised the operation of the Czech National Bank to set an even greater example. Not only did we emphasise restraint in wages, but we also laid off five per cent of our staff. That was quite unpleasant, but we wanted to set an example. Everywhere in the public sector is recruiting differently. You may lay off some people, but then you can give raises to those who have a great track record.
Supporting the growth of the domestic economy
The Czech National Bank can help the Czech economy in two ways. Firstly, by keeping inflation stable. And there is no train running over that. And secondly, by establishing financial stability. With financial stability and low inflation, we create the best environment that people and businesses can want for growth. And that is not created by the Czech National Bank or the government, that is a chimera. No strategy, no ministerial documents do it. Growth is created by entrepreneurs and their ideas.
Adoption of the euro
The key to adopting the euro is for politicians to know what they want. So when the political establishment calls the shots, which means that they agree to join the euro, we as the Czech National Bank will do the de facto job for them in a completely professional manner. We will create the conditions for either a stable koruna or for the adoption of the euro, depending on exactly how we agree with the Prime Minister, present or future.
cnb.cz/ct24/gnews.cz-Roz_07
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