The financial world is driven by interest rates. This is the remuneration that a lender receives and the cost that a debtor bears. A simple concept, which however often escapes chasing the acronyms and technicalities of the indices. Here are the most important ones, to better orient yourself between mortgages and economic policy.
In recent months, after the post-pandemic recovery, but also due to the supply chain difficulties of the global market, and above all after Russia’s invasion of Ukraine and the war, there has been a recovery of the inflation. Prices have started to rise again, in certain sectors at a dizzying rate but in any case in general around 8.5% (February 2023 figure in the EU area). This situation has alarmed central banks, which have raised interest rates to try to reduce the circulation of money and inflation. The current increase in prices has extraordinary and exogenous causes, which is why high rates could have a negative effect on the economy, without having a positive effect on inflation: causing a situation of possible stagflation.
The rate of the European Central Bank
The ECB rate is the general indicator of the entire system. And for this very reason it is called the “reference rate”. Once upon a time, when rates were national and the Bank of Italy decided them, it was called the official discount rate. The substance does not change: the ECB rates are the main parameter for defining the main refinancing operations. In other words, they determine the cost of money which, passing through the banks, has repercussions on the credit granted to households and businesses. The ECB therefore has the role of regulator: if the economy slows down, low rates stimulate investments, consumption and (in general) a greater circulation of liquidity; if the economy accelerates, rates are adjusted upwards to prevent excessive inflation.
The Bank of England
The Bank of England raised its key interest rate by another 25 basis points to 4.25%, a new 15-year high, after annual UK inflation returned to +10. 4% in February.
Seven members of the nine-member Monetary Policy Committee voted in favor of the hike, while only two voted to keep the Bank’s rate at 4.0%. This is a slightly sharper grade than the 6-3 expected by the.
The decision comes just a day after the Office for National Statistics said inflation rose to 10.4% last month, with record food prices and solid wage growth more than offsetting the gradual reabsorption of the soaring energy prices.
Governor Andrew Bailey signaled after the latest 50 basis point hike in February that the Bank might not tighten policy further. The Bank has once again sought to look beyond the latest inflation surprise, saying “a sharp decline remains likely for the remainder of the year”.
At the same time, however, the BoE has revised its expectations for the British economy upwards: the Bank now sees growth of 0.4% in the second quarter, after having expected a modest decline in its February assessment due to new fiscal support measures presented in the government budget, a still strong labor market and the reabsorption of energy prices.
UK interest rates have thus reached a level of 4.25% since monetary policy tightening began in November 2021. However, the UK interest rate remains more than 6 percentage points below the current CPI, with savings and debts which are then eaten away by inflation.
The Bank of England was the third European central bank to raise interest rates on Thursday, following a 50 basis point hike by the Swiss National Bank and a 25 basis point hike in Norway.
All this a day after the Federal Reserve raised the reference range for fed funds by 25 basis points, to 4.75%-5.0%
USA rates: 2023 FED’s target is 5%
The Federal Open Market Committee (FOMC), the Federal Reserve body responsible for US monetary policy, announced an interest rate hike of 25 basis points to 4.50%-4.75%, the highest level high since 2007; the increase is in line with analysts’ expectations. The reduction of the Central Bank’s balance sheet will also continue.
This is the eighth consecutive rate hike. In December, the Fed had raised rates by 50 basis points; in the four previous meetings, between June and November, it had always raised them by 75 basis points. Interest rates had been lowered to 0-0.25% in March 2020, to counter the negative effects of the coronavirus pandemic on the US economy, and then progressively raised in 2022, to counter inflation.
This is a submitted article.
