What will be the effect of the interest rate hike?
For many Americans, life is becoming more and more expensive. Inflation was 8.5 percent in March. This means that Americans are paying significantly more for the same shopping cart products today than they did a year ago. To prevent those rising prices, the Federal Reserve (Fed) raises interest rates by half a percentage point.
“The US economy is heating up,” said Tom Symonds, a senior economist at KBC. “So the central bank had to run the air conditioning because of those price hikes Out of control. In general, central banks are targeting a maximum inflation rate of 2 percent.
Raising interest rates to combat inflation is the oldest trick in the economist’s book. For example, if it costs more to borrow, families will wait longer to buy a home. They put more money in a savings account because it brings less money in there. Thus if the market demand decreases then prices will start falling again.
“A rate hike is not so important,” says Symonds. “But we expect the Fed to do it three more times this year. Financial markets have seen it come a long way and have been looking forward to adjusting their interest rates for five to ten years. Americans looking to buy a home will certainly realize it.
What triggers inflation?
In recent years, central banks have done everything they can to reduce inflation through lower interest rates. But inflation soared by the corona. During the Lockdown period, consumers were unable to travel or eat outside. So many had more money for other things. They can buy a new bicycle or renovate their house. But on the other side of the world, the corona disrupted production processes.
“Due to lockdowns, factories had to close,” says Symonds. “At the same time, there was a shortage of all kinds of raw materials: wood, aluminum, you name it. So prices have a crescent. When the corona epidemic more or less subsided, war in Ukraine was added to Europe. This led to a significant increase in gas and oil prices.
Will the European Central Bank (ECB) also raise interest rates?
Inflation in our country was 8.31 per cent in April. Economists say the European Central Bank (ECB) has no choice but to raise interest rates to control rising inflation in the eurozone. But the ECB will raise interest rates later this year so as not to paralyze the eurozone economy.
“We can already see that the growth of Germany and Italy is somewhat negative,” says Paul de Grove (London School of Economics). “So the ECB is still reluctant to raise interest rates. It all depends on what happens to the eurozone economy in the coming months.
In terms of energy prices, the situation in Europe is different from that in the United States. While energy prices in Europe play a major role in inflation, Americans are less affected.
Is the recession in a corner?
Some people are afraid of that. A recession occurs when at least two quarters of negative growth follow each other. Initially, analysts expected the US economy to grow 1.1 percent in the first quarter. But suddenly they were given a 1.4 percent contraction. If the U.S. economy shrinks further this quarter, Americans will officially be in recession.
Compared to the United States, the European economy has grown less in the past year, but is experiencing a slower decline. In the first quarter, the eurozone economy grew by 0.2 percent. But according to Symonds, we should also be prepared for a small contraction in a quarter.
By 2023 and 2024, the growth rate of our economy will return to the same level as before the Corona. “At the moment, companies are not even finding enough people to fill all their vacancies,” says Symonds. “A little breathing is welcome. In fact, our economy, like the ever-upward cyclist, is now at its peak, where it can breathe and rest its legs.
Some say there is still a risk if resuming growth is not successful. Then there is the risk of ‘stagnation’. The term refers to a stagnant economy struggling simultaneously with high inflation. If there are European limits while inflation continues, we will end there.
The effects of such stagnation can be very serious. If consumers have to pay higher fees at the store, they will demand higher wages from their employers. Companies have to overcome these high wages at their own cost. Economists call this the ‘wage-price cycle’, which is extremely detrimental to the economy.
“Stockflection is a horror scene,” says Symonds. “Because the ECB can’t go anywhere. Then raise interest rates to keep inflation in check. But if the economy is already bad, it’s like pushing a drowning person down.
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