Yesterday, the Institute of International Finance published its regular quarterly analysis looking at overall global indebtedness, i.e. the indebtedness of all economic agents – governments, businesses and households. During this year's second quarter, total global debt rose by $5 trillion to a new record of $296 trillion. The ratio of total global debt to global GDP fell slightly to 353%, thanks to the strong recovery of the world economy in the second quarter, however the ratio was still near the all-time high. Overall, this clearly confirms the well-known fact that the volume of total debt in the world economy has never been higher.
Given such a high level of debt in the global economic system, in my opinion, there is no way that the key central banks, led by the US Fed and the European Central Bank, will be able to tighten the currently ultra-easy monetary policy significantly in the coming years. In the case of the Fed, there is so far only discussion of a possible gradual reduction in the volume of bond purchases under the quantitative easing program (tapering). As for the start of an increase in base interest rates, this is very unlikely to happen for several years to come. The position of the European Central Bank is very similar.
And as for the Czech National Bank, due to sharply rising inflation, 4.1% year on year in August, it has already begun the cycle of raising base interest rates, when its key interest rate is currently 0.75% and more and more economists discuss that the CNB could raise the key interest rate even by half a percentage point to 1.25% at its next meeting on 30 September. The Czech economy can afford slightly higher interest rates, in contrast to the USA and the euro area, as the level of total debt in the Czech Republic is significantly lower. Nevertheless, real inflation-adjusted interest rates will remain deeply negative, so the so-called financial repression will not disappear from the Czech capital market in the foreseeable future.
Michal Stupavský
Investment Strategist at Conseq Investment Management, a.s.