There has been speculation in recent days that Thursday’s interest rate hike by the European Central Bank (ECB) could be the last, but internal sources at the company have confirmed that there may be more.
The ECB’s only goal is to keep inflation below 2%, and this goal has not yet been achieved. Overall growth in the Eurozone is 5.3% and in Spain it is 2.6%. Further interest rate hikes could trigger a recession in the European Union, but curbing inflation is the ECB’s priority over this undesirable effect. The big problem is that the interest rate increase is not working at the expected speed: “Despite the interest rate increase, inflation is not falling with the expected intensity,” explains economist Lorenzo Bernaldo de Quirós.
According to this monetary theory specialist, interest rate hikes mean that the economy will cool down after 12 to 18 months and inflation will return to the expected target after 18 to 24 months. Taking into account that the first rate hike occurred in July 2022, Bernaldo de Quirós believes that inflation could be at 2% at the end of 2024. “Interest rates have already been raised sufficiently.” “If we do this any further, there will be a recession and stagnation of the economy,” he says.
Both he and Professor Rafael Pampillón emphasize that changes in monetary policy (interest rate increases) only have a delayed effect: they do not occur immediately; You have to be patient, but the ECB doesn’t have it and is raising interest rates. “The mistake was the ECB’s internal delay (the long time it waited to raise interest rates). Now the external lag is increasing due to the more entrenched inflation,” adds economist José María Rotellar.
Furthermore, the ECB does not take into account the development of monetary aggregates such as M3, which measures the money supply in the system (in this case the money supply circulating in the EU). An excessive amount of money in the system causes inflation, but “now there is a sharp contraction of money and they are not paying attention.” They prefer to raise interest rates further when there is no need to do so. You just have to wait,” says Bernaldo de Quirós.
Now the ECB will watch how inflation develops after Thursday’s interest rate hike. If the 2% target is still not achieved, the new increase could take place at the end of the year.
Rising interest rates could lead to recession and stagnation of growth in European economies. In addition, it has consequences for companies and families. As Professor Rafael Pampillón explains: “By increasing interest rates, both families and companies have less access to credit, since the increased interest rate is the European Central Bank’s interest rate, that is, the interest rate at which they lend to banks, and the banks pass on this higher interest rate on loans to the private sector, families and businesses. Therefore, families are reducing their consumption capacity because some have extended their mortgages and others have less money to consume, and companies are reducing their investments because it costs them more. So these are the future prospects, which could worsen if there is another rise in interest rates. At the moment, the so-called hawks, the ministers who favor raising interest rates to curb inflation, are winning.
On the other hand, we must not forget that the Euribor, the index to which variable rate mortgages refer, closed at 4.073% in August and exceeds 4.1% in the middle of this month. The renewed interest rate increase makes it entirely possible that the Euribor will continue to rise.