It can easily be called the week of interest rate hikes. The Fed is likely to deliver a rate hike on Wednesday, followed by the ECB on Thursday. But, economist Arnoud Boot tempers expectations, interest rate changes will be smaller than before.
According to Boot, these are interest rate steps that will likely amount to 50 basis points. “But more importantly, they’re very clear that they’re willing to pursue a pretty aggressive monetary policy until inflation is under control,” he says. ‘Inflation is extremely costly to the economy, creates huge uncertainty in terms of investment, big distribution problems, etc. The bottom always gets hurt on inflation, so fighting inflation is key.’
Earlier, Fed Chief Jerome Powell said that the peak in inflation has passed and that interest rate hikes can therefore be smaller. But Boot thinks it’s a dangerous idea. “I wouldn’t be against the Fed being more aggressive with its rate hikes,” he continues. «And also with the reduction of the budget. They still have everything in that balance sheet that is meant to lower interest rates.’
After care
While Boot expects the hike to be 50 basis points, he stresses that it’s critical to look at the aftermath of the interest rate hike. “What expectations are they issuing beyond that increase, or hopefully making a little over fifty basis points.”
If the increase is indeed more than 50 basis points, Boot believes it sends a strong signal. “Fighting inflation is therefore top priority, you say that incredibly clearly,” he continues. ‘The reason it’s being scaled down a bit now is also due to the southern European countries. People saying central banks are causing a recession. But people forget that they are talking about two percentage point interest rates. Since when hasn’t an investment been made because interest rates have risen to two percentage points?’
In a corner
According to Boot, central banks have therefore cornered because of their policies. ‘Very low interest rates, negative interest rates, always saying ‘we will support the economy no matter what’, (…) has made the economy very sluggish and hesitant. We need private player initiative in the economy, and that won’t suffer from a two percent interest rate.”
Source: BNR
Andrew Dwight is an author and economy journalist who writes for 24 News Globe. He has a deep understanding of financial markets and a passion for analyzing economic trends and news. With a talent for breaking down complex economic concepts into easily understandable terms, Andrew has become a respected voice in the field of economics journalism.
