Reasons Behind Increasing Interest Rates

Increasing interest rates are a constant source of concern for borrowers. The fact that another ECB interest hike is almost imminent some time this autumn is news that will not be received well by borrowers and will undoubtedly leave countless people in financial trouble. Yet despite this, there is still reasonable cause for central banks to consider raising interest rates.

Output is still continuing to grow at surprising levels. Although this does not necessarily herald the arrival of huge inflationary pressures anytime in the near future, the ECB will certainly wish to curb any potentially adverse inflationary effects and it is well known that prevention is better than cure. Monetary expansion is continuing at healthy levels but a closer look hints that much of this could be resulting from inflows of money that attempt to take advantage of promising interest rates. Mortgage lending is also leveling off agreeably, while wage pressures have not yet surfaced. However, if output levels remain constant, it is likely that this situation could change soon.

Economists are suggesting that the optimal rate of interest would be somewhere in the region of 4.5%, while others suggest that the unbiased rate is somewhere below 4%. Due to this conflict of interests, the ECB may decide on a rate of around 4.25% in order to satisfy all parties.

Capacity limitations are also emerging in some areas, although mainly in construction and producer prices are continuing to grow at their highest levels since 1995. Rising oil prices are contributing to this problem. Pressures such as these will influence any future ECB decisions regarding interest rates.

Taking all growth rates into consideration, and the strong desire of the ECB to counter any inflationary movements in markets, it is highly likely that it will increase interest rates beyond their current levels in the very near future. Future economic slowdowns however will hopefully level off any more continued upward trends, the likes of which we have witnessed over the previous 18 months.

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