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The relationship between interest rate hikes and inflation is not always direct

Jun 22, 2023

Redacción Mapfre

Redacción Mapfre

Investors are once again watching central bank meetings this week, with Bank of England (BoE), National Bank of Switzerland (SNB) and Central Bank of the Republic of Turkey (TCMN) meetings.

Matellán recalls that the relationship between the rise in rates and the fall in inflation “is not as direct as we would like to think” and points out that in the United Kingdom “inflation is harsher than in Europe and the United States,” so the forecast is that the Bank of England will continue to raise rates further.

MAPFRE Inversión’s chief economist explains that, at the general level, the central banks' work is to “react to high inflation levels,” and recalls that it comes from very low interest rate levels. “It’s true that the rise in interest rates affects many sectors, but it’s more reasonable to have rates at a level of 3% or 4%, than at 0%,” he insisted.

In the current context of increases in the West, the most affected sectors are those most exposed to debt and the long-term, such as real estate and infrastructure. For this reason, Matellán argues that we must look at the company, and not sectors in general, given that a specific industry could feature a company with a higher level of debt than another, or the debt terms between them may vary and the company with short-term debt would be less impacted.

The forecast is that rates will remain high for a longer period of time, taking into account the review of macroeconomic projections, is Ismael García Puente, fund manager and selector at MAPFRE. Patrimonial. He also argues that both the Federal Reserve (Fed) and the European Central Bank (ECB) have become “more insensitive to lower growth,” so “except for a systemic failure,” no change is expected in the road map.

The danger now is that these bodies overdo it on wanting to cool the economy too quickly. “Economies aren’t machines,” says García Puente, and he recalls that there have been two very strong shocks in recent years: the pandemic and the war in Ukraine.

The case of China is different, where the official rate has just been cut by 0.25 points. Matellán explains that the country doesn’t have an inflation problem, but does have a growth problem, so it’s normal for rates to fall.

“The market has a low-rate bias that isn’t always correct,” he points out, and the case of China is particular due to the impact of foreign liquidity. "Raising and lowering rates is a way to control the liquidity of the system. When the Fed increases liquidity, it also does so in China, "he says.


Poor forecasts for the German economy

The German economic institute IFO (the Leibniz Institute for Economic Research at the University of Munich) forecasts a 0.4% decline in the country's economy this year, 0.1 percentage points higher than indicated in its last spring forecasts. These expectations are based on a worsening of effective and expected data, which are coming in below expectations.

Matellán believes that these worse forecasts will affect the eurozone as a whole, although Germany no longer drags down the rest of the European countries to the same degree as 15 years ago.

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