What for central banks? Maya This thing, which ferments flour to make good bread, is not just a tool for families and companies. bedbug this undermines their income. For central banks, high interest rates are a fungus that needs to be controlled while it ferments. inflation. They are insects that make mortgages, businesses’ lives and investments expensive for families and companies. For the government, it’s both: the more interest rates help keep inflation under control, the less additional spending on pensions; However, as interest rates increase, the budget item becomes more expensive to pay the interest on the public debt.
Recently, central banks have increased interest rates rapidly, cool economic growth We are already in 2022, but these consequences will be more intense in 2023 and the blow will be even greater in 2024. According to the calculations of the Bank of Spain, the increase in interest rates will subtract 1.2 points from the growth of the Spanish economy in 2024. Otherwise, the 1.8% GDP growth predicted by the Bank of Spain for 2024 could have been 3% with further job creation if not for the increase in interest rates.
Although the impact of the increase in interest rates on loans, GDP and inflation is already very serious, the President of the Bank of Spain, Pablo Hernandez de CosA warning appears that it is not completed yet. And the increase in interest rates, like yeast and woodworm, delayed effects. President European Central Bank (ECB), Christine Lagardegenerally explains that “on average the maximum effect of the increase in the official interest rate on economic growth has been reached” during the second year After its implementation the maximum effect on inflation usually lasts even longer, between three and four years“.
Less growth and less inflation
From July 2022 official price of money In the Eurozone, the rate increased from 0% to 4.5%; This rate is the highest since 2001. And it will stay there for at least a long time, until inflation moves forward decisively. 2% target, As Lagarde repeated. Analysts do not expect the first interest rate cut until the second half of 2024.
The Bank of Spain said that this tightening of monetary policy subtract two tenths inflation 2023 and four-tenths of both 2024 and 2025, as forecast in its Annual Report in May. The agency predicts that inflation will fall to an average of 3.6% this year, then rise to 4.3% in 2024 (if Government measures are withdrawn) and fall again to 1.8% in 2025.
At the same time, the Bank of Spain itself estimates that the increase in interest rates translates into: lower growth It will fall by 0.6 tenths of a percentage point in 2002 and 1 percentage point from that in 2023; According to calculations updated in September, it is 1.2 points compared to 2024 and 0.3 points compared to 2025. Thus, GDP growth of 2.3 percent was achieved. Bank of Spain Without the impact of the increase in interest rates, the forecast for this year could be 3.3%. AND until 2024Same thing: If there had been no hardening in the official price of money, the economy could have grown by 3% instead of 1.8%.
The ECB calculates that for the euro area as a whole, interest rate growth will fall on average by at least two percentage points annually for each year between 2022 and 2025, before seeing inflation return to 2 percent in 2025. According to the IMF, historically, inflation-fighting processes take an average of three years.
Four links of the money chain
The monetary policy chain contains at least four links. First, the official price of money rises. Then loan and mortgage interest rates rise. Households and companies then stop spending for this reason. Finally, the decrease in demand ceases to put pressure on prices and inflation slows down.
First link: official price of the coin
ECB since July 2022 ten consecutive ascents Interest rates, which left the price of money at 4.5% in September, remained at the same level in October. Federal Reserve It began its climb in March 2022, and after eleven increases, it currently keeps the fiat price within a range of 5.25% to 5.50%, a 22-year high. While both monetary authorities are not closing the door on new increases in interest rates, there is a general sense that they may have already peaked and the question now is how long interest rates will remain at such a high level. The International Monetary Fund (IMF) advises central banks not to rush to cut interest rates prematurely.
Second link: more expensive mortgages and credit
Banks Tightening lending conditionsat the same time Request for financing from companies and familiesAccording to the European Central Bank, this level has fallen to levels typical of the global financial crisis in 2008 and the euro crisis in 2011.
Between July and September, for the sixth consecutive quarter (since March 2022), Spanish banks tightened both the lending criteria that lead them to decide whether to grant loans and the conditions they require (such as types of loans). interest, amount, maturity and required guarantees). Demand has also fallen, as it has since last January. According to the latest bank credit survey published by the Bank of Spain, institutions expect a “new decrease” in both supply and demand in the fourth quarter of 2023, albeit “a little more moderate” than in the summer period.
with all IMF “Although official interest rates have risen faster than in previous tightening cycles, the evidence so far suggests that pass-through has been somewhat slower.” In its regional report on Europe published this Wednesday, the IMF explains that “as in previous chapters, there is greater transmission of monetary policy interest rates into bank interest rates in new credit flows.” loans to companies for non-financial deposits (elasticity 0.8) than for mortgages (elasticity 0.6) and weaker for demand deposits (elasticity 0.1)”.
In the case of Spain, average mortgage rate It has increased by 2.3 points since December 2021, reaching 3.436% in August. Rest loans to households rose just over one point (6.94%). Inside loans to companies, The increase in price was even greater: the average rate increased from 1.24% at the end of 2021 to 4.96 in September 2023 (increase of 3.72 points).
In no case did the increase in credit reach 4.5 points, which indicates that the official price of money has increased, which shows: The rise in loan prices has not ended yet.
Third link: households and companies stop spending
All this toughening led to the credit balance to the private sector in Spain falling by approximately 2% to 1.152 billion euros.
In the first nine months of the year New credit for families and companies There was a decrease of 7.6 percent compared to the same period last year. In particular, giving new mortgages fell almost 17%, while new loans to companies fell 8%. Only bank loans for consumption and other purposes increased (8.3%).
And this trend will continue for a long time. The Bank of Spain predicts that loans will not grow again until the second half of 2025.
There is a real reflection of the link between the tightening of financial conditions and the economic slowdown. residential real estate sector, While new loans decreased by 26% in the first half, house buying and selling dropped to just over 15.33% and price increase is moderate Up to 3%.
Fourth link: Inflation is slowing down
More expensive and less abundant financing ultimately lower demand and therefore there is less pressure on prices.
This monetary logic For example, it may break if: increase in salaries It results in accelerating and compensating for the income loss caused by interest rate increases in families. “Labor markets may be tighter than expected, workers’ demand Higher wages to regain lost purchasing power The IMF warns that “wage-price feedback loops may be triggered and recent positive shocks in wage formation may persist.”
Thus the situation in the United States full employment (unemployment rate 3.8%) is a despondent factor that contributes to rising wages and GDP growth. Federal Reserve This cannot bring the necessary coolness to the economy to curb inflation. US GDP grew 4.9% year-on-year in the third quarter, the highest growth since 2021. The surprising power of consumption. Although inflation is far from the maximum of 9.1 percent in June 2022, it is still at 3.7 percent (September data) and Fed Chairman Jerome Powell thinks there is “still a long way to go in the future.” “The process of sustainably reducing inflation to 2 percent.”
Monetary logic may also collapse if worsening oil and gas prices rise. Conflict in the Middle East.
“Political efforts to combat inflation and its negative effects are beginning to bear fruit, but the fight is not over yet“, resolved in the IMF regional report on Europe.
Source: Informacion
James Sean is a writer for “Social Bites”. He covers a wide range of topics, bringing the latest news and developments to his readers. With a keen sense of what’s important and a passion for writing, James delivers unique and insightful articles that keep his readers informed and engaged.