Central banks are marking a year of continued interest rate hikes to hunt down runaway inflation. A fact that has its consequences because it determines the conditions in the money market when commercial banks borrow or invest with central banks.
Central bank interest rates have a cascading effect across the Eurozone, sharply influencing the rates that commercial banks offer to households and businesses. Consequently, mortgages, car loans and credit cards are becoming more expensive and less attractive.
Based on ECB forecasts, inflation is still too high and will remain above target for an extended period. In fact, annual inflation in the eurozone reached 10.7%” in September, an all-time high and almost five times the 2% target pursued by the ECB. The three Baltic countries showed inflation rates above 20%.
Central banks seek to “strangle demand” by raising the price of money. Inflation or recession, those are the cards we have on the table, and the monetary authorities are committed to contracting GDP and cooling the economy.
This whole process requires time, which is reduced the more aggressive it is in raising interest rates and the liquidity restriction in the system is investigated. Once they begin to have an effect on the real economy, the main economic indicators deteriorate and it will be at that point -if inflation is short-tied- when interest rates begin to fall.
Many are waiting for that moment. Especially those with a variable-interest mortgage linked to the Euribor, which after the last review, average mortgages are paying up to 800 euros more annually. Then, How much time usually elapses between the last interest rate increase and the first decrease?
To do this, let’s take a look at the Federal Reserve, which has already seen it in all colors, especially in the 1970s, with high similarities with the current environment due to pension prices. In this case, If we look at the last 50 years of the Fed, the average time period between the last rate hike in a cycle and the first rate cut has been 7-8 months..
As we say, the ECB has a shorter life, with the starting point in 1999. Even so, we can do the same exercise. Interest rates rose in October 2000 to 4.75% and we saw the first cut in May 2001 in seven months, leaving them at 4.50%.
Next, we have to go to July 9, 2008 when, despite the signs of economic weakness, it led to its last interest rate rise, leaving it at 4.25%. Already in the month of October of that year they saw the panic unleashed in the markets and the economic deterioration and interest rates fell to 3.75%. Only three months in this case.
We saw its last drop in interest rates, before the peak, in 2011 in the heat of the debt crisis. In July of that year interest rates were raised to 1.50%. Y four months later, in November, interest rates were cut to 1.25%.
As we can see, in recent crises the ECB has been somewhat quick in lowering interest rates compared to its last rise. Nevertheless, the situation for this monetary authority is newa double-digit inflation that must be stopped.
Source: El Blog Salmón by www.elblogsalmon.com.
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