Across the EU, there is still a “mixed picture” regarding inflation. ‘In Germany it went from 7.2 to 6.1. In France there is 0.8 percent, in Spain there is 1 percent and in Italy over half a percent. But one country goes up while other countries go down. Interest rates are falling, particularly in the larger countries,’ says Jasper Lukkezen, editor-in-chief of the economists’ magazine ESB.
He also stresses that the ECB’s interest rate expectations should be taken into consideration. ‘The interest rate hikes the ECB is making now will only have an effect on inflation in six months. This is the long braking space of monetary policy, which Klaas Knot (CEO De Nederlandsche Bank, ed.) sometimes talks about.’ But even as we look to the end of this year and the beginning of next, the ECB sees interest rates will remain “relentlessly high,” according to Lukkezen. “It also adds up.”
Given this mixed picture, the ECB appears to have no choice but to continue raising interest rates. “They will continue with hikes until they see a notable drop in long-term inflation expectations. Only when they see it will the increase be stopped.’ But as a result, there seems to be no limit on the amount of interest. “They say, ‘Let’s scale up until it’s no longer needed.’ But I don’t think they know when it’s no longer necessary.”
More failures
The consequences of high interest rates will be reflected in the business community. Lukkezen therefore calls it a “rotten remedy”, because “investment projects are also becoming more expensive”. ‘There will be more economic uncertainty, companies will postpone investments or not make them at all. And consumers won’t spend money, they’ll put it in the bank, because you get more interest too.’ These effects will cause the economy to “slow down further” but that will also lead to bankruptcies, warns Lukkezen. ‘This leads to less rigidity in the labor market, which in turn leads to companies having less room to raise prices further. And this curbs inflation.
Raising interest rates is therefore an “equine remedy” that “works,” Lukkezen believes. “If inflation isn’t stopped voluntarily, so companies blocking price increases on their own, then things are going to go badly.”