The ECB will raise interest rates again next month in the fight against inflation. BNR internal economist Han de Jong is not surprised: “Inflation appears to be more stubborn than we previously thought, so it stands to reason that they will continue with this for a while.”
“The ECB must communicate clearly that interest rates will remain at their highest levels for as long as necessary.” ECB President Christine Lagarde sent this clear message during the annual meeting of central bankers in Sintra, Portugal.
“The ECB will only stop when it thinks inflation will drop to 2% and stay there”
De Jong also notes that inflation is still at an “unacceptably high” level. What matters to him, he says, is that ‘the ECB was one of the last central banks to start raising interest rates. And even then at a lower level than other central banks. It therefore seems logical to him that the European Central Bank should continue to raise interest rates for a while, especially as many economists admit that inflation is proving more stubborn than previously thought.
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Opposition
Furthermore, the central bank is meeting with opposition, says De Jong. On the one hand, this has to do with governments spending a lot of money and thus countering the idea behind interest rate hikes by deliberately slowing down the economy. On the other hand, according to De Jong, it doesn’t help that the interest rate on the capital market is lower than that of the central bank. “As a result, the ECB has to work even harder.”
The first consequences of interest rate hikes are now visible. ‘This too is allowed,’ says De Jong, ‘after an increase of four percentage points. Indeed, the first effects were already visible before the start of the interest rate hike. The capital market is anticipating these increases and this is immediately noticeable in interest-sensitive sectors such as the real estate market.’
Scenario to avoid
But according to the economist, the thumbscrews can still be tightened. “The ECB will only stop when it thinks inflation will drop to 2% and stay there,” says De Jong.
The scenario it hopes to avoid is one in which inflation remains high, despite the best efforts of the ECB, but the economy enters a recession. “Then the politicians start screaming bloody murder,” he says. “Let’s hope it doesn’t happen, but we can’t rule it out either.”
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.
