While it’s often been suggested that interest rate hikes by the European Central Bank aren’t out of the air just yet, economist Edin Mujagic thinks the end of the hikes is in sight. “I think they’ll stop before the summer.”
Mujagic bases it on research by economists affiliated with the IMF and the Bank for International Settlements. They looked at credit card payments in Germany, the largest eurozone country, between 2017 and 2021 to find out how changes in interest rates affected consumption.
“This shows that the effect is very strong, we already knew that. But it also appears that the effect can be seen in consumer spending patterns after only two months.” So we react much quicker to changes in interest rates than a consumer would have done 30 years ago.’
Up or down
We also looked at whether there is a different response to raising interest rates versus lowering interest rates. ‘It appears that the effect is large if the ECB raises interest rates. We all suffer from it and it is clearly visible in our spending pattern. But if interest rates are lowered, there will be no effect. Nothing happens.
An explanation for this is not given, but Mujagic thinks he knows a cause. “Interest rates are lowered when the economy is bad. People are often gloomy, worry about the future, and don’t like to spend money. This will be the explanation for the lack of reaction when interest rates are cut.’
This European study follows a regional study by the Federal Reserve in Kansas. At the end of last year, this showed that even the effect of higher interest rates will be evident sooner than previously assumed. ‘Normally, a change in the interest rate after one and a half to two years has a significant effect. According to these two researchers, this is different. ‘
End of elevation in sight
It has already been indicated several times that the European Central Bank will raise interest rates even more often. This was also said recently by Klaas Knot, member of the Executive Board of the ECB and president of De Nederlandsche Bank, among others. However, according to Mujagic, the ECB should look closely at examining the spending pattern in Germany.
“They have to print this report 26 times and then distribute it to central banks in the eurozone. It is not true that the effects of interest rate hikes will only be visible in a few years, they are already there, which is why I think the ECB will stop raising interest rates before the summer”.
UK doomsday scenario
At the same time, Mujagic predicts a prolonged and deep recession for the British economy. ‘The problems in the Netherlands are serious but of a transitory nature. They are manageable and do not get out of hand. While the UK is dealing with structural problems.’
Mujagic sees a clear connection to Brexit. ‘You can’t ignore the fact that they left the EU. In ideal circumstances, that would already be a major blow to the economy, but in hindsight it can be said that the British left the EU at the worst possible time. This has consequences for the economy.’ Partly due to Brexit, the British have a harder time solving the staff shortage, the free movement of people is no longer possible with the UK since Brexit.
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.
