Lessons from high inflation: tighter monetary policy, two new forecasting models and an open CNB
High inflation must not be allowed to recur. Thanks to tight monetary policy, open communication and a strong koruna policy, the Czech National Bank (CNB) succeeded in taming double-digit inflation in 2022–2023 and returning it to the 2% target. It then undertook a monetary policy review to make itself better prepared for similar situations in the future. The CNB is now offering an inside look at the discussions behind the change in its approach to preparing key materials for the Bank Board’s monetary policy decision-making, the development of two new forecasting models and the strengthening of its research capacity. It has published on its website the Proceedings of the Czech National Bank Workshop on Monetary Policy: Inflation Targeting Frameworks Under Review, featuring a foreword by CNB Governor Aleš Michl.
Three years ago, in July 2022, inflation in the Czech Republic stood at 17.5%. The CNB’s forecasting model at the time was recommending further rate hikes above the then level of 7%, but the Bank Board, under the leadership of Governor Aleš Michl, opted for a different strategy. It decided to keep interest rates unchanged until it was confident that inflation was on track to return to the target, and communicated this intention openly to the public and markets. It also supported a strong koruna policy.
This approach resulted in the strongest exchange rate of the koruna against the euro in history and the tightest monetary conditions in 20 years in spring 2023. Inflation dropped sharply to near the 2% target in January 2024. The average inflation rate for 2024 as a whole was 2.4%, the lowest since 2018.
The CNB has now published the proceedings of the international Czech National Bank Workshop on Monetary Policy: Inflation Targeting Frameworks Under Review. This concludes the first phase of the external review of its monetary policy analytical and modelling framework. The Bank Board initiated this review in response to the turbulent inflation episode of 2022–2023.
In his foreword to the proceedings, Governor Aleš Michl presents the rationale behind the decision to openly review the CNB’s monetary policy analytical framework and summarises the Bank’s approach to tackling inflation. He provides a detailed account of the Bank Board’s strategy during the period when inflation neared 18%, noting that traditional macroeconomic models underestimated the impact of global shocks and often failed to forecast inflation accurately. For the first time in its history, the CNB commissioned three independent external reviews of its modelling framework. These focused on the forecasting performance of the core model, its suitability as a sole forecasting tool, and the interaction between monetary and fiscal policy. According to the Governor, a central bank must be able to learn from the past and adapt its tools to a new reality in which the economy is affected by unexpected and difficult-to-model factors. The review of the modelling framework is therefore a key step towards ensuring future price stability.
Based on the recommendations of the review teams, the CNB has decided to expand its modelling framework. It will develop two new alternative models to complement its existing tools, enabling the Bank to better manage forecast uncertainty and respond to hard-to-predict economic shocks. This aligns with the practice of many other central banks which routinely use multiple forecasting models. The first components are expected to be ready for internal testing in late 2025 and early 2026, with development of the new models continuing throughout 2026.
The reviewers also recommended strengthening the CNB’s research and data analytics capabilities. On 1 January 2025, the CNB established a new Research and Statistics Department, replacing the former Statistics and Data Support Department. An important task for the new department is to develop alternative macroeconomic models. It will also focus on enhancing the CNB’s data infrastructure and expanding the role of research beyond model development.
The final versions of all the external evaluations were published on the CNB website in November 2024. In April 2025, the CNB presented these evaluations in detail, along with the conclusions of the first phase of the monetary policy review, at the international Czech National Bank Workshop on Monetary Policy: Inflation Targeting Frameworks Under Review. The outputs of this conference are now available in the Proceedings of the Czech National Bank Workshop on Monetary Policy: Inflation Targeting Frameworks Under Review. In addition to contributions from domestic and international experts – including the former head of the BIS Monetary and Economic Department Claudio Borio and ESCB Monetary Policy Committee Chair Óscar Arce – the publication features a foreword by CNB Governor Aleš Michl summarising the CNB’s approach to monetary policy during the period of elevated inflation and the steps it took to bring inflation down.
Jakub Holas
Director, CNB Communications Division