Central Bankers: Don’t Be Afraid to Experiment

Lubos Pastor: When you took office in July 2022, inflation in the Czech Republic stood at 18 percent. Within two years, it had fallen to below 2 percent. What were the key elements in your strategy to bring down inflation?

Aleš Michl: For more than 10 years prior to the COVID-19 pandemic, the Czech Republic’s key central bank interest rate was below inflation. That motivated everybody to spend, which encouraged inflation. We also had a weak-currency policy—the CNB actively weakened the Czech currency and increased the amount of money in the economy.

When I took office, my team and I completely changed the logic of monetary policy—from motivating people to spend to motivating them to save. We kept the policy rate at 7 percent, and we said publicly that we would keep the rate higher than before, and for longer.

I also publicly declared a strong koruna policy. The koruna strengthened to a record level against the euro, without any direct foreign-exchange intervention.

And it was enough. Sometimes less is more.

Pastor: Why did you decide to keep the interest rate at 7 percent instead of raising it, as your own internal model reportedly suggested?

Michl: Our model largely underestimated the role of money. During a period of rapid money growth, increasing debt, and rising asset prices, the model recommended keeping rates close to zero for more than 10 years to push inflation up. Then, when high inflation arrived, that same model recommended raising rates to 10 percent or more to fight it. I found that crazy. That’s why we decided to keep interest rates higher for longer compared with pre-COVID levels—to erase the inflationary pressure that built up over more than 10 years.

Models are tools, not masters. We do not have Skynet from Terminator, and I am not sure I would even want it.

Pastor: There is political pressure on the US Fed to cut rates and keep them low. Did you feel any pressure to cut rates, any political opposition to “higher for longer”?

Michl: Yes—but I strongly support free speech. Politicians, businesspeople, and members of the public have the right to hold any opinion, including criticism of the central bank. But the bank board has a duty to make decisions independently.

Our goal is to keep inflation low, while the goal of politicians is to win elections. These goals are understandable and legitimate, but they are not always compatible.

Pastor: Where do you see inflation going? Will the growing amount of public debt play a role?

Michl: High inflation can still return in Europe. The main risk is a sharp rise in public debt. That’s why central banks should remain strict: Keep the policy rate above inflation, support saving, and remind people that the economy is not only about spending.

In the Czech Republic, our policy rate is now 3.5 percent, inflation is 1.6 percent, and our outlook is around 2 percent. Core inflation is about 3 percent. If we see declining momentum in core inflation, we may have some room to cut rates, but we’ll still keep the policy rate higher for longer compared with the pre-COVID period. Otherwise, we are keeping all options open.

Pastor: Central banks tend to be very conservative investors, holding mostly safe assets like Treasuries. In comparison, the CNB has been willing to take on much riskier bets, even before you took over. For example, the bank has held equities for many years. What fraction of your portfolio is in equities? Which equities? What is the economic role of equities in the portfolio?

Michl: We manage a portfolio worth $176 billion. That’s about 45 percent of GDP. Relative to the size of the economy, it’s one of the largest central bank portfolios.

When I started at the CNB, we had 7.65 percent in equities. Now we have 26.2 percent. We had 0 percent in gold; now we have 6 percent.

The economic role of equities is to increase diversification and raise expected returns over the long run.

Pastor: A common view is that the sole purpose of a central bank’s asset portfolio is to support financial stability. That’s why central banks tend to hold mostly safe assets. Is it fair to say that you believe that it is also important for a central bank to make profits for the Treasury?

Michl: According to the law, our goals are price stability and financial stability. But we also deliberately made the job a bit harder for ourselves by taking on the challenge of improving the bank’s profitability. When I became governor, the expected return on our assets was lower than the cost of our liabilities. We turned that around.

Pastor: You have increased the bank’s holdings of gold and plan to increase it further. Can you explain why? Aren’t you worried about buying more gold at a time when its price is so high?

Michl: We have been buying gold since 2023 with the aim of diversifying our foreign-exchange reserves. We buy it regularly, about 1.75 tons per month. We will not change this strategy. Our target is 100 tons.

As a diversification asset, gold has close to zero correlation with equities. We need it for the long run. As a central bank, we have a never-ending investment horizon. That’s why we don’t try to time the market.

Pastor: About a year ago, you announced your intention to invest up to 5 percent of your reserves in Bitcoin. What role might Bitcoin play in a central bank’s portfolio?

Michl: There are very few assets with near-zero correlation to equities or bonds. In a large portfolio, you need some of them to improve diversification. Bitcoin’s potential advantage is that its correlation with bonds has been low. The challenge is that its history is still short. We have known gold prices for a little over 100 years. Bitcoin has a market price history of only about 16 years. Its future value could be very high, or it could go to zero. Both are possible. This kind of valuation uncertainty is typical for new technologies, where investors learn over time about long-term productivity and payoffs.

In a paper we published in February, CNB researchers Tomáš Adam and Michal Škoda and I ran a simple “what if” exercise. We asked what would have happened to the CNB’s reserve portfolio had we added a small share of Bitcoin. Using data from 2010–25, we find that Bitcoin looked like a strong diversification asset. The model predicted that a 1 percent Bitcoin allocation would have raised average returns much more than a similar increase in equities or gold, while increasing overall portfolio risk by less (per unit of return).

Pastor: Have you purchased Bitcoin since that announcement?

Michl: Yes. But we have started slowly and created a test portfolio of digital assets, including Bitcoin, outside of our foreign-exchange reserves.

We launched the portfolio in November 2025. The initial investment was $1 million, and we will not increase it from there. The portfolio will include Bitcoin, US dollar stablecoins, and US dollar tokenized deposits.

A full evaluation is expected in two to three years. We will judge success mainly in terms of learning and our ability to operate, not in terms of short-term profits.

We will test different ways to buy and sell. We will test custody, crisis handling, anti-money-laundering compliance, and accounting. And we will build expertise—learn, understand, and prepare for the future.

Pastor: Have you considered launching your own central bank digital currency—a digital crown?

Michl: No. If the goal is fast and cheap payments, instant payments are a better solution. I’m a liberal in the tradition of Milton Friedman—I prefer market-based solutions. The state, and the central bank, should provide the infrastructure.

In the Czech Republic, the central bank provides the instant-payments infrastructure. Over the past four years, we have improved it so that everyone can use instant payments.

Pastor: Do you use AI at the CNB? How?

Michl: Yes. In one year, we have made strong progress. We use AI to improve inflation nowcasting—Adam, our colleague Josef Švéda, and I even wrote a post about it on the cnBlog last year. In supervision, we use AI as a first check to see whether all required documents are included.

Pastor: Do you plan to increase your use of AI in the future?

Michl: Yes, significantly. In February, we added four new NVIDIA H200 GPUs to start testing our own AI models in-house. It’s a starting point, not a giant training cluster. We will invest further in AI and cybersecurity.

Pastor: Bulgaria joined the eurozone in January, making the Czech Republic one of only six EU countries with its own currency. There are some political forces in your country pushing to adopt the euro. How do you see the pros and cons of the euro versus your own currency?

Michl: Our strong koruna policy helped us a lot in the fight against inflation. That’s why I support keeping the koruna in the Czech Republic.

Pastor: What are the main challenges for Europe today?

Michl: Governance. Europe needs fewer bureaucrats, less red tape, and more delivery, so better governance is essential. At the CNB, we cut staff by 5 percent early on, and it increased clarity, ownership, and performance.

Aleš Michl has been the governor of the Czech National Bank since 2022. Lubos Pastor is the Charles P. McQuaid Distinguished Service Professor of Finance and a Robert King Steel Faculty Fellow at Chicago Booth. They spoke in February as part of Booth’s Distinguished Speaker Series. This Q&A draws on their remarks and expands on it through further reporting.