Are we there yet? The European Central Bank has increased interest rates at an unprecedented speed over the past year, but there are finally signs that the peak may not be too far off. Speaking after yesterday’s announcement of the ninth rise since last July, the ECB president, Christine Lagarde, hedged her bets on what might happen after the next meeting in September. There might be another rise, she said, or interest rates could be left where they are.
The outcome will depend on the economic data in the meantime and particularly the trend in inflation, which is still way above the ECB’s 2 per cent target, but now falling fast. A concern for the ECB will be that it has moved too far, too fast, unnecessarily suppressing economic growth and helping to drive the euro zone economy into a recession. So far, however, it has judged that persistently high inflation is the greater risk.
The difficulty for the ECB, as with the US Federal Reserve Board which also increased interest rates this week, is that it will only be clear in hindsight whether it has taken the correct approach. Higher interest rates take time to pass through to consumers and businesses and then to have their full impact on the economy. These lags make monetary policy as much an art as a science.
The unpredictable trend in inflation is vital now for Irish borrowers. A continued fall in inflationary pressures would allow the ECB to hold off future increases, or perhaps restrict itself to at most one more. Were euro zone economic growth also to slow, interest rates might even start to fall some time next year. As of now, however, borrowers would be unwise to rely on this. And almost certainly ECB interest rates will not return to the rock bottom level seen for many years before the upward moves started last summer.
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There is surely a strong case now for the ECB to wait and see the full impact of the interest rate increases announced so far. A significant burden has already been placed on homebuyers and growth in many euro economies is weak. It is time to give borrowers a break.