July 5, 2022

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At busy times for central banks due to inflation, the US raises interest rates faster than Europe

At busy times for central banks due to inflation, the US raises interest rates faster than Europe

The US Federal Reserve raised interest rates by 0.75 percent on Wednesday. This is the central bank’s third rate hike this year and the biggest in three decades.

“Obviously, such an increase is unusual and I do not expect it to be common in the future,” said Jerome Powell, chairman of the central bank.

The European Central Bank, the ECB, has previously increased Week More interest. News hours Economist Vimar Bolhuis asked why the interest rate was so important. Why America is moving faster than Europe.

US wages will rise even faster

Higher interest rates are intended to control supply and demand. Demand is greater than supply in the United States at this time, which drives up prices. Inflation in the United States has not been so high in forty years: last month it was 8.6 percent.

In addition, something else is going on. “Wages are rising in Europe, but wages are rising even faster in the United States,” said Bolhois, a leading economist at Ecorys Consulting with the University of Leiden.

Raising interest rates makes savings more attractive and consumers, governments and corporations do not want to invest. Supply and demand The goal is to influence the demand side in the game. Low consumer demand means lower prices.

However, high interest rates take a long time to filter out the low prices of many goods and services. It is not uncommon for groceries to become cheaper the day after an interest rate hike, six to twelve months from now.

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Southern European countries

Inflation is also high in Europe. In the Netherlands it is 9 per cent. Nevertheless, after a limited rate hike, the ECB has now chosen to borrow from European countries that have to pay higher interest rates. Further raising interest rates will worsen the situation in southern European countries such as Greece, Spain and Italy, which already have to pay higher interest rates.

“The good news is that the ECB does not borrow the same amount from all countries, but only from poorer countries. Last week’s price hike.

“Nations should always have the opportunity Refinancing and borrowing are the only way to get the money out quickly. Raising taxes or raising money in another way is often a long-term process for countries, so it is important that countries can do it. Provide money quickly at good interest rates.

The interest rate for southern European countries is already higher (for example, twice as high as in the Netherlands), so if the ECB raises interest rates further, there is a risk that the interest rate will become higher than in the South. European countries can no longer borrow.

War

But there is another reason why ‘turning the interest rate bubble’ may not work in this situation. “The big question is whether the problem is caused by high demand,” says economist Bolhuis. “The supply side can be a problem in this situation and it cannot be controlled by the central banks.”

Central Bank President Jerome Powell said the war in Ukraine would lead to a shortage of crude oil and commodities, which would push up food and energy prices. Even the central bank does not know whether raising interest rates will solve this problem. But raising and lowering interest rates is one of the few tools that central banks can use.

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By buying the loans, the ECB wants to send a signal that it will help the southern European countries and thus avoid a crisis, according to Polhuise.