The interest rate pivot has come – it will change the economy

Author

Sebastian Matthes is the editor-in-chief of Handelsblatt.

This is the difficult path behind the European Central Bank (ECB) and its head Christine Lagarde. The almost perverse central bank management in the Frankfurt ECB tower entrenched the same rationale for a low interest rate: This rising inflation was “unusual” but “only temporary”. The media, which had long raised the obvious dangers of inflation in its title, was publicly reprimanded: they all sowed panic. It will not be as bad as in the US.

The reality was different. Even before the outbreak of the war in Ukraine, it was clear that the world was facing a prolonged phase of high inflation and a slower pace of growth. The green transformation of the economy is driving prices as much as global problems with the supply of important commodities. So now the ECB is changing course. However, this change in interest rates does not come about a few months, but years too late.

Because the “specter of deflation” that former ECB chief Mario Draghi has tried to fight has never arisen. Therefore, the interest rate reimbursement is at an inappropriate time. As central banks later react to price increases, the more violently they have to intervene – and the greater the risk of an economic collapse.

Germany is now facing a kind of stabilization crisis: rising interest rates are making corporate loans more expensive; they will be able to invest less, which in turn reduces the demand for raw materials, industrial precursors and other commodities. This is hitting the economy in a delicate phase. Many companies are suffering from high energy prices and labor shortages, and some may soon run out of gas. Still, it is good that the payback in terms of interest rates is finally coming. If money costs nothing, it often has costly consequences.

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Fast turning nonsense

This was evident in the real estate market, where brokers have recently got rid of boxes with bad rubbish at exorbitant prices. Someone was always reaching out. Data from Immoscout24 shows how fast the market is changing: In the second quarter, demand for residential real estate on the portal fell by 36%. compared to 2021. The reason: rising interest rates on real estate loans.

>> Also read: The ECB is late in raising interest rates – now a crash is imminent

In a world where capital is free, all kinds of fast-growing crap are being financed. This is true for many industries. This was especially bad for tech companies where business ideas were valued at billions that never made any money. For example, rapidly growing delivery services. Netflix also conquered the world with cheap money. This year alone, the streaming service has invested $ 17 billion in new movies, series and documentaries – credit-financed: Netflix’s net debt was $ 8.5 billion in June. Shareholders have long been blinded by this story of credit-funded growth, but stocks have lost two-thirds of their value since the collapse.

The winner-take-all game flourished in the zero-interest phase: corporations like Apple and Google have borrowed billions in recent years to buy back their own shares. Earnings per share increased as a result of buyouts reducing the number of transferable shares. In contrast, the absolute profits of many companies have stagnated and even declined. This trick is more expensive now.

What policy needs to change

Politicians must also act differently from now on. Thanks to negative interest rates, the federal government has made good money in recent years from new debt. In 2021, it was almost EUR 11 billion. Ministers are used to solving their problems by spending billions, as reflexes show today. But it is also over. In 2023, Federal Finance Minister Christian Lindner expects interest payments of up to EUR 30 billion. In 2021, it was four billion euros. One problem with monetary policy remains: Draghi saved the euro in 2012, claiming that the ECB would do everything possible to prevent the collapse of the euro area, but also put the central bank in dilemmas. Because the ECB has a mandate to ensure monetary stability. Draghi declared coherence as a new, unofficial goal. Until now, however, the ECB had no formal mandate to do so. Ironically, Mario Draghi returns to the spotlight today, this time as the country’s outgoing prime minister who could plunge the euro into another crisis.

More: The ECB raises the main interest rate more than expected and decides to use a new crisis instrument

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