2023-07-27 13:47:08
And once more the policy rate of the European Central Bank in Frankfurt rises slightly, this time by 0.25 percentage point to 3.75 percent, which is the highest level in the existence of the ECB. In 2000 and 2001, interest rates were already this high.
The increase is not a big surprise: consumer prices are still rising so stubbornly that central bankers cannot stand by and watch. An interest rate hike is a good weapon once morest that. It makes it more expensive for consumers and businesses to borrow money, thereby reducing spending. This in turn leads to less pressure on the prices of goods and services.
The question is now whether this was the last increase for the time being. Especially now that the drawbacks of the ECB’s policy are becoming increasingly clear. Higher interest rates stifle economic growth. That is a necessary evil, something that the central bankers are actually pushing for. But there comes a point where they begin to unnecessarily harm the eurozone economy because inflation is already on its way out even without another increase.
The decline was much greater than banks themselves had expected
When is it enough, when are the interest rates too high? That is difficult to determine. It can easily take nine to eighteen months for a central bank interest rate rise to be fully reflected in the real economy: before it translates into the interest rates that commercial banks charge customers, before spending in the economy actually declines.
The eurozone is therefore only now experiencing the consequences of the interest rate hikes implemented by the ECB last year. And that suddenly goes fast. For example, demand for corporate credit has never been as low as in the second quarter of this year, according to a large survey by the ECB among all major banks in the eurozone this week.
The decline was also much greater than the banks themselves had expected, they indicated. The main reason: the higher interest that companies now have to pay.
Companies are more likely not to receive a loan
Banks themselves are also less and less eager to issue loans, according to the same study. After all, the expected low economic growth in the near future increases the chance that a company will not be able to repay a new loan. So companies more often get zero on the request at the credit desk.
In parallel, activity is declining in the eurozone. The authoritative consultancy firm S&P Global mainly saw the manufacturing industry running less. The European services sector still grew slightly in July, but less rapidly than in the previous months.
S&P Global warns that this will make entrepreneurs more cautious regarding hiring new staff. Although high unemployment in Europe is not very likely now, given how tight the labor market is at the moment.
The likelihood of a recession is increasing
According to ING economists, the chance of a recession is increasing. The ECB itself maintains that its interest rate hikes have a ‘powerful effect’ on the economy. According to the central bank, this is also necessary, now that inflation at 5.5 percent is still too high in the eurozone. The ECB aims for an inflation rate of 2 percent in the medium term.
Nevertheless, given the declining economy and the equally declining inflation figures, it might well be the last rate hike for the time being. That will become clear in September, when the ECB board meets once more for an interest rate meeting.
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