Rozhovor s Alešem Michlem, guvernérem ČNB
Francine Lacqua a Krystof Chamonikolas (Bloomberg 8. 11. 2024)
Guvernér ČNB Aleš Michl v rozhovoru pro Bloomberg TV uvedl, že pro dlouhodobé udržení inflace u cíle je potřeba držet sazby výše, než tomu bylo v období deseti let před covidem, a mít dlouhodobě vyrovnané veřejné finance.
Rozhovor (anglicky)
Monetary policymakers should keep interest rates higher than pre-pandemic levels and governments need to exercise discipline to prevent the return of a cost-of-living crisis, the Czech Republic’s central bank chief said.
Czech National Bank Governor Ales Michl said on Friday that lingering inflationary pressure is the result of excessively loose monetary policies over the last decade that saddled the global economy with too much money. The central bank this week delivered an eight-straight rate cut, but Michl signaled that a halt to the easing cycle was in sight.
“The policy mix for the future should be, firstly, keeping interest rates higher than before Covid for the next 10 years,” Michl told Bloomberg Television in an interview in London. “Secondly, which is also important, governments must balance their budgets. Because if they don’t do it, there could be the risk of a second wave of inflation.”
European policymakers are bracing for economic turbulence — including the prospect of a trade conflict — with the reelection of Donald Trump to the US presidency. In the Czech Republic, central bankers are grappling with a worsening outlook as key export market Germany struggles — and weighing it against persistent price pressure.
While inflation is being driven by volatile food costs and temporary effects, officials are pointing to rising prices of services and a rebounding housing market as grounds to remain cautious.
Michl said the best way to ensure price stability in a small and open economy like the Czech Republic is through budget austerity, which will also curb underlying domestic pressures.
Core inflation should remain “slightly below” the central bank’s 2% target, Michl said. Rate setters are discussing when to bring rate cuts to halt, since that goal hasn’t been met, the central bank chief added, declining to provide a timeframe for a potential policy shift.
The threat of tariffs from a new Trump administration may shake up the European automotive industry, on which the Czech Republic relies heavily for exports, according to Michl. He criticized carmakers for what he called their focus on climate targets and regulations rather than boosting competition with electric-vehicle producers like Tesla Inc. and Chinese companies.
“I expect some creative destruction in the automotive industry in Europe,” he said. “Maybe automotive sector will be a sad example of how regulation can harm an industry.”
The governor also reiterated his plan to increase the central bank’s gold holdings to about 100 tons in the next three years to diversify reserves. At $150 billion, the reserves are among the largest in the world relative to the size of the economy. The bank is also gradually raising stock holdings to boost the expected return on the reserve portfolio.
“At the same time we need to reduce volatility,” Michl said. “And for that, we need an asset with zero correlation to stocks, and that asset is gold.”
The Czech currency has been more resilient than its regional peers to swings in global sentiment toward riskier assets. The koruna gained as much as 0.2% to the euro on Friday, outperforming east European counterparts that mostly weakened.
Rozhovor pro Bloomberg TV
I’m delighted now to be joined exclusively by the Czech Central Bank Governor Ales Michl. Thank you so much, Governor, for joining us here on Bloomberg and on The Pulse. How close are you to actually halting interest rate cuts?
Good morning, Francine, and thank you for having me. Let me start with the big picture. When I became governor two and a half years ago, inflation was at its highest level since the change from communism to capitalism 30 years ago. Inflation was 17.5%. We managed to reduce it to exactly 2% at the beginning of this year. Right now the rate is 4%. We are saying we still have to be restrictive. Austerity is good. Austerity keeps core inflation very, very low. It’s necessary to keep core inflation very low. That’s the only way we can keep overall inflation low in a small, open economy like the Czech Republic.
Governor, if you look at many places in Europe, inflation is nearing 2%, but there are certain pockets where actually there’s persistent, sticky inflation, there’s inflationary risks. Where do you see them?
That’s the case for the Czech Republic as well. We were among the first countries in Europe to achieve the exact target of 2% inflation at the beginning of this year. But inflation is not dead. Our problem was that before COVID, interest rates were close to zero for more than ten years. Too much money was created in the economy. That is why the inflation pressures are very persistent, or inflation is persistent. I think the policy mix for the future should be, firstly, to keep interest rates higher than before COVID for the next ten years.
So higher for longer?
Higher for longer. And secondly, and this is also important, governments must balance their budgets. Because if they don’t, I think there could be a risk of a second wave of inflation. And another cost shock could be a trigger for this inflation.
But, Governor, it’s difficult because if growth is hurt because of too restrictive monetary policy, then that will lead to social inequality. But you also have to fight inflation. So what’s the lesser of the two evils?
Milton Friedman compared inflation to alcoholism, and I agree with that. The story is that when you drink too much or when you print too much money, bad effects come later. By that, he meant inflation. But for the treatment the opposite is true. The bad effects come first – that’s the recession – but positive effects come later.
So can you talk us through your thinking in terms of what you’re already discussing when to halt rate cuts? When could that come?
Right now, core inflation in the Czech Republic is 2.4%. We are saying that for the future, for a small and open economy, it’s necessary to have core inflation slightly below 2%. It’s not in our outlook. That’s why we are already discussing when to stop the rate cutting process.
What’s the right way to proceed with that? I mean, could it come as early as mid next year?
We will see. No timing, no guidance.
Governor, we’re discussing a lot the potential of extra tariffs from the U.S. under President Trump. The Czech economy is also very dependent on car sales, and that’s slowing down in Europe. How concerned are you about tariffs from the U.S. and car sales?
It could be a problem for us, for the Czech Republic. I expect some creative destruction in the automotive industry in Europe. The largest and most famous automotive company in the Czech Republic is Škoda Auto, part of Volkswagen. I think they made a big mistake by focusing only on following EU targets and dreams of regulators instead of competing with Tesla and Chinese cars. I think the automotive sector may become a sad example of how regulation can harm industry. We, as the Czech National Bank, must set an example. That means we have to be more pro-market. What does it mean? It means, for example, that we reduced our workforce by 5% and we will introduce a programme to cut red tape. But we have to stay strict. At the same time, we will keep the same level playing field.
Governor, talk to me about gold. I mean, you’ve significantly been increasing your gold reserves. Why is that? And how much more will you buy?
Right now you are smiling. So you like gold?
Well, I mean, you’ve probably done pretty well on the gold reserves, right?
We are buying gold to diversify our foreign exchange reserves. Currently, we have EUR 140 billion in foreign exchange reserves, which is around 50% of our GDP. We need both – we need long-term return and diversification. We are gradually increasing our stock holdings to boost our expected return or expected income. At the same time, we need to reduce volatility. For that, we need an asset with a zero correlation to stocks. And that asset is gold. That’s why we are buying gold.
How much more will you buy?
We started with 8 tonnes of gold, almost nothing. Right now we have 40 tonnes, and we will have 100 in the next three years.
That’s very impressive. Governor, thank you so much for joining us today on Bloomberg. That was the Czech Central Bank Governor Ales Michl joining us for an exclusive conversation.