Let’s start a little broadly. In our current world of conflict, the traditional way of fighting with weapons is increasingly being abandoned. However, this does not mean that the desire to fight has stopped. Only the means and the warfields have changed. Today, wars have shifted to economic and information warfields. One of the ways to wage war today is through interest rates. These affect the strength of the currency and, consequently, the capacity of exports and imports.
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The Czech economy and the Czech koruna are so small that we cannot influence the battle between China and the rest of the world in this field. However, where the CNB’s move may intervene is a discussion in other countries about raising rates. Examples are, as we have seen in the exchange between the CNB Governor and the current Minister Schiller.
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Colombia, Mexico, Norway and Brazil have recently increased their rates. By contrast, Denmark and Turkey have reduced their rates. It is difficult to deduce from this selection which countries are lagging behind and which are not. Rather, it indicates that each country has its own context and, above all, its sovereignty over monetary policy. And we should appreciate that.
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In the European Union, there are voices from the Netherlands and Germany that rates on the euro should be positive, as they are currently harming savers in these countries for a long time. However, the increase will be difficult to enforce, as it would automatically send heavily indebted southern states into trouble, with sharp increases in debt service costs.
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The American professional public is pushing the Fed to raise interest rates. This would at least reduce the impact of inflation. Although the Fed argues that inflation is higher than expected and should act, it also adds that the time has not come to raise rates because unemployment in the US is higher than before the crisis. This is not the case in the Czech Republic, because we now have an unemployment rate of 3.6%.
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Like every thing in the world, low interest rates have their pros and cons. Low interest rates are very beneficial in the short term, helping to stimulate the economy. Businesses and people can borrow money cheaply, so they invest it or buy goods for it. Cheap money will affect economic growth.
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The disadvantages of low rates are mainly in the long run. It destroys the mentality of savers. At a time of low interest rates and higher inflation, it is absolutely not worth saving and building up stocks for worse times. On the contrary, the best one is one who has a long-term loan at a small interest rate. The negative effect of cheap money is the survival of so-called zombie companies. That is, companies that would normally go bankrupt, but thanks to cheap loans are able to refinance their activities. The economy, in which Schumpeter’s creative destruction does not occur, lags behind and becomes obsolete. We reiterate that these effects will not be felt for a long time.
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The magic of low interest rates also has its political level. As low interest rates favor short-term profits over long-term disadvantages, they have become a popular tool for politicians. It will allow it to achieve results immediately, but the consequences of this decision will be addressed only by their successors. No wonder all politicians in power are proponents of low interest rates. These rates will provide them with the desired economic growth essentially without work. It is clear from this that whoever wins the next election will put pressure on the CNB again to reduce rates or abandon the idea of raising them. However, from my point of view of a small saver, I want the CNB to maintain as much independence as possible, to withstand political pressures and to conduct monetary policy to the benefit of long-term national interests.
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