A good wish for the ECB – don’t hit growth with interest rates!

All of Europe teeters on the brink of recession. Above all, expensive energy is behind the stagnation of growth.

If the winter turns out to be particularly cold and calm, the price of energy will rise further and there will be power cuts all over Europe.

Households weigh the most on the euro area’s economic outlook. Accelerating inflation has eaten away at purchasing power and disposable income has shrunk as a result of high electricity and gas bills and rising interest rates.

European Central Bank ECB intends to continue with a tightening interest rate line. The ECB raised its key interest rates by 0.50 percentage points in July and by 0.75 percentage points in September.

“We currently expect to raise rates further over the next several meetings. Our purpose is to dampen demand and prevent a rise in inflation expectations”, ECB President Christine Lagarde stated on Monday.

The 12-month Euribor, which is commonly used as a reference interest rate for mortgages, has already risen to over 2.5 percent and will continue to rise.

The social security stress test was published last year in Kela’s research series. The study simulated a situation where interest rates would increase 1.5 times and the household would face unemployment.

According to the survey, approximately 16 percent of Finnish wage-earner households would not be able to survive on essential consumption if unemployment and interest rate hikes coincided. That would mean around 150,000-200,000 households.

Now the interest rates are already clearly higher than that simulation. Fortunately, employment development has been strong, and the forecasts do not show a large wave of unemployment, but the turnaround can happen quickly.

At least one wish can be made in the direction of the European Central Bank. Don’t drive the European economy to the wall at full speed. The bullish tightening of monetary policy threatens to do just that.

The German central bank, the Bundesbank, has already warned that the country’s recession is becoming deeper and longer than expected. A drastic tightening of interest rates would worsen the situation in the entire euro area.

Inflation must be curbed, but the effects of interest rate increases cannot be monitored in real time, nor can they be regulated like a nuclear power plant. For this reason, rapid interest rate hikes can lead to a more drastic than expected growth stagnation and human distress after a delay of a few months.

This is hardly what anyone wants, even though the adjustment of monetary policy seems to lead to this very outcome.

By Editor

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