Maximizing Savings: The Impact of Inflation on Household Investments in the Czech Republic

Even though the wave of inflation forced many households to start moving their savings into higher interest products and many discovered the magic of real investing, most failed to tap into their savings. protect or greatly reduce the loss.

Let’s see how households responded to the increase in inflation. Over the past three years, according to statistics from the Czech National Bank, the amount of household deposits in banks increased by around 700 billion to 3.7 trillion crowns by January of this year.

Money in current accounts fell by about 240 billion to 1.41 trillion crowns, and in the last three years it lost about 400 billion from its purchasing power, taking into account cumulative inflation.

The biggest shift occurred in the direction of time investments, which grew 500 billion to 1.03 trillion crowns over the past three years. This movement, which has never been seen in history, proves that inflation also had a positive effect and people started looking for better value for their money. However, even the better interest rates on these deposits, which were increasing around six percent, could not protect the deposits from inflation in recent years, and inflation took 150 to 200 billion another from them.

This year, the situation should be stable, your savings should withstand inflation and, with the exception of money in current accounts, even beat it easily. Even if the current inflation is around two percent, the central bank keeps rates above 5 percent, and banks offer deposits with interest from 4 to 6 percent. Bank deposits will affect future inflation, but it is unlikely. As rates gradually fall, interest on deposits will also decrease.

Investing is a very effective long-term hedge against dwindling savings. according to survey by EY since the middle of last year, about half of the Czechs are investing, but only a quarter regularly.

Mutual funds are very popular in the Czech Republic, which has seen a significant increase in assets under management over the past three years. The assets of natural persons in these funds increased by 220 billion to 825 billion crowns over the past three years. Compared to the money deposited in banks, it is about a fifth of the amount.

According to the Swiss Life Select Czech Investor Index, the average value of mutual funds last year reached 12 percent, and in the long term, according to Swiss Life Select chief analyst Richard Bechník, mutual funds have appreciated an average of 7.8 percent annually over that period. five years ago. Money is doing well this year too, but of course the results will vary depending on the strategy chosen and the willingness to risk potential losses.

Investing is obviously the best long-term strategy for protecting your savings, increasing them in the future, and thus securing an additional financial cushion in old age in addition to the state pension .

The introduction of a long-term investment product this year is also intended to support investments for old age. The government also supported regular investments in investment products by increasing people’s savings for old age through investments reducing their tax base to 48,000 a year.

In addition to this support, however, it is necessary to improve financial literacy and support the development of the capital market, so that the majority of domestic savings are not directed in the form of investments in foreign securities. The domestic capital market still does not offer enough opportunities.

If we take, for example, the market capitalization of shares on the two main markets of the Prague Stock Exchange, we reach a value of 1.4 trillion crowns, ie approximately as much as what households keep in current accounts. And almost half of the value of the Prague Stock Exchange consists of one single stock, the state-controlled ČEZ.

At the same time, experience from abroad shows that a developed capital market with state support is an important part of an active economy and a place to finance companies and give value to the savings of residents. Sweden is a big inspiration, for example, which was recently highlighted by the British Financial Times. It has attracted 501 companies to its capital market in the past decade, excluding Britain there is no parallel anywhere in Europe.

Sweden already introduced investment savings accounts in 2012, and individual investors are exempt from reporting their holdings and tax on capital gains or dividends. Instead, the entire value of the account is taxed at one percent per year.

The government’s undervalued or even neglected capital market was also noted by the government’s National Economic Council experts in their cases. a set of measures, which could help jump-start the Czech economy in the future. For the long-term investment account, they recommend more stimulation from the Swedish model, the introduction of employee shares and, above all, avoiding measures that would weaken the capital market .

And that’s one of the things that, without exception, none of our cabinets did well. Since the days of coupon privatization, Czech governments have not used the capital market to privatize state-owned companies, and despite various calls to support the capital market, politicians do not seem to willing to consider it seriously.

On the other hand, we recently experienced strong tension around ČEZ, which is one of the leading companies on the Prague Stock Exchange, when the upcoming law raised serious concerns about whether the government would else, to nationalize ČEZ and would it. it would happen under fair conditions for small shareholders. Fortunately, the government eventually decided to cancel the originally proposed law.

Another step, which cannot be seen for sure to support the capital market and strengthen the confidence of investors, is the current considerations of the government coalition on a dividend tax for banks. At the same time, three important banks – Komerční banka, Erste bank (owner of Česká spořitelna) and banka Moneta -, as well as ČEZ, are other blue chips of the Prague Stock Exchange. Discretionary taxes on banks would seriously damage investor confidence in the domestic capital market. In addition, the money that the government would collect from the “fat” bank into the budget would be largely in reality bank clients moneyfrom which the banks would collect money either by increasing the price of some services or by reducing interest on faster deposits.

The government does not have a clear strategy to support the capital market. Assuming she wants to support him at all. But if he encourages people to invest with more tax breaks, he should make it one of his priorities. And on the other hand without introducing new taxeswhich just goes against it.

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