ales michl : the road to the target speech by mr ales michl, governor of the czech national bank, at the university of economics and business, prague, 15 may 2023. * * * dear rector, esteemed guests, it was a privilege for me to study and obtain my master's degree and ph. d. here at the university of economics and business. i have good news for the public today : inflation is finally falling. annual headline inflation peaked in september last year, when it reached 18 %. we managed to stop it. in line with our expectations, a gradual downward trend in inflation started in february this year. inflation fell to 16. 7 % in february and then to 15 %. and finally, in april, it stood at 12. 7 %. within three months, it should be below 10 % in annual terms. this is not a victory. in the second half of the year, inflation will still be at a level we must not put up with. we must not get used to it. we must not adapt to it. interest rates will therefore remain high for longer. a strong koruna is also important for the economy. based on fra rates, the market is expecting a rate decrease as early as in the next quarter. we consider the market expectations regarding the timing of the first decrease in rates to be premature. we must continue to fight for long - standing low and stable inflation. a strong koruna played an important role in the turnaround in inflation. we adjusted the monetary policy strategy in july 2022. we stabilised interest rates and verbally supported a strong koruna. in a speech at masaryk university in november 2022, i presented the conditions under which our koruna would be strong again ( michl, 2022 ). although we did not raise the cnb's repo rate further to more than 7 %, we managed to have a record - strong currency. the average monthly exchange rate of the koruna to the euro was the strongest ever in april 2023, reaching czk 23. 44 to the euro ( for comparison, it was czk 23. 55 to the euro in july 2008 ). i will always be proud if we have a strong koruna during my mandate. in 2023 q1, the strongest - ever koruna together with the highest interest rates since 1999 created the tightest monetary conditions in more than twenty years ( a more detailed analysis is available in

channel is also gradually cooling as the ecb raises its rates. in q1, the volume of new euro loans to firms fell by 6 % year on year. the decline in demand in the economy is documented by the following : household consumption, which is crucial for the future course of demand - pull inflation, fell for the sixth consecutive quarter. the saving rate is now 21. 7 %, while the long - term average is 12 %. the decline in demand is also illustrated by the fact that prices of new apartments are already falling quarter on quarter. this is accompanied by the fact that the economy is below potential output and we have a negative output gap. i would like to mention two important problems : ( 1 ) the cnb's large balance sheet and ( 2 ) government debt. regarding the cnb's large balance sheet, over the last ten years, interest rates were too low, in fact zero for a long time. in addition, in early 2017, interventions led to an increase in the cnb's balance sheet within four months, or rather in the banking sector's liquidity. it increased from czk 1, 300 billion in december 2016 to czk 2, 300 billion in april 2017, i. e. there was an additional czk 1, 000 billion in the balance sheet, or an almost doubling of the balance sheet within four months of 2017. during these interventions, demand for czech government bonds from non - residents increased. this further expanded the country's borrowing options. budget constraints 3 / 7 bis - central bankers'speeches were eased. then, during covid, in particular at the end of march 2020, interest rates were reduced too close to zero. and fiscal policy was expansive for too long – we created a dangerous entitlement economy in which the state was the rich uncle who helped with almost everything. when an economy such as this one ( especially one with a huge surplus of money and incomplete price convergence ) was hit by a strong supplyside shock after the lockdowns, the czech republic ended up with the highest core inflation in the eu ( from november 2021 to october 2022 ). we address the causes of inflation in the czech republic in our blog article ( adam and michl, 2022 ). bullard ( 2023 ) also wrote an article on this topic last week. the central bank's large balance sheet can lead to changes in monetary policy transmission. this is also because when key interest rates