“The market expectation is that interest rates will rise by fifty basis points for both the Fed and the ECB,” said De Jong. For the Fed this means the seventh consecutive rate hike, for the ECB the fourth. “So we’re still a bit behind in Europe, but we also started raising interest rates later.”
Given that previous interest rate changes were always 75 basis points, a 50 basis point increase therefore means a weakening of interest rate growth. “Those 75 basis point passes were extraordinarily large, especially if you do a straight number of them,” says De Jong. “In the past, increments of a quarter of a percentage point were the most common. Furthermore, monetary policy acts on inflation with a certain lag. So if you keep raising rates until you hit your inflation target, you’re probably going too far and causing unnecessary damage to the economy.”
Expectations
De Jong does not expect all other interest rates to develop in parallel with the central bank’s policy rate. ‘Savings interest rates have lagged significantly, so I think they will continue to rise. But the capital market interest rate has been declining for some time, which means that the mortgage interest rate for mortgages with a longer fixed interest period is also falling again.’
In the United States, capital market interest rates have long been lower than money market rates. “The capital market interest rate is the result of market forces, it is a reflection of what the market expects from what the central bank will do in the long run,” explains De Jong. “This means that the market expects the Federal Reserve to cut interest rates again in the not-too-distant future.”
recession
Such a situation, where the official interest rate is higher than the capital market interest rate, has historically always heralded a recession, says De Jong. ‘It’s a very reliable predictor of recession. If you don’t forecast a recession in the US now, you’re going against a very consistent pattern over the past forty years.’
De Jong expects central banks to cut inflation sharply next year. ‘You can already see that logistics disruptions in the world are decreasing, international freight rates have already dropped dramatically. The price of oil has also dropped considerably recently. This has everything to do with China’s economic weakness and feared recession. A recession usually pushes inflation down.’ According to him, European energy prices remain the biggest factor of uncertainty. “But the factors that normally predict long-term inflation mean that inflation will be much lower next year than it is now.”