Saying goodbye to our low interest rate reality | DW Business Special

The era of low interest rates is ending. Can higher lending costs beat back the soaring consumer prices without triggering an economic crisis? After a decade of extra–ordinarly low, and in some cases even negative – interest rates, central banks are scrambling to turn off the easy money taps as prices for food, energy, and housing skyrocket around the globe. What does it mean for consumers, and developing markets, who are already feeling the pinch? DW Business looks at how we got here and where we’re headed.

It’s the end of an era that’s the era of low interest rates can higher lending costs beat back the soaring consumer prices without triggering an economic crisis i’m christy platson with your topic of the week from dw business after a decade of extraordinarily low in some cases even negative interest rates central banks are now scrambling to turn off the easy

Money taps as prices for food energy and housing skyrocket around the globe what does it mean for consumers and developing markets who are already feeling the pitch pinch well i’m joined by my guest veronica grimm of the german council of economic experts and jens corta our dw financial correspondent at the new york stock exchange who are going to break this

Topic down for us thank you both so much for joining us so let’s hop right into it i want to take a look at why central banks are taking action well this is obviously about inflation otherwise known as price growth the u.s has seen some of the highest price hikes in annual terms prices hit a 40-year high in february already going up 7.9 percent year on year now

Since then they’ve gone up several more times and economists were hopeful after inflation slowed slightly in april but then prices shot right back up again in may all right well sticking with the us i’d like to go with yen go to yen’s here first so yes tell us how are things looking in the u.s has your morning coffee got more expensive how are these price jumps

Affecting new yorkers yeah sure i mean you feel and see it left and right but also if you look at some parts of the industry for consumers look at uh cars for example new cars you will cut used cars americans buy those with car loans right so those are going up we see a huge spike in mortgages so it’s going to be much more um expensive to finance your home

Then we almost have a record level of credit card debt so that’s also getting more expensive when you go shopping and clearly you look twice what you buy because pretty much everything seems to be getting more expensive all right well jens we know that this environment of easy money created a big boom in more risky stocks like uh tech also cryptocurrencies can

You talk to us about what the relationship was here yeah definitely i mean we had a huge amount of liquidity money was cheap basically in the past about 15 years actually mohammed al-aryan he is the chief economic adviser at allianz he put it in a nice way he also pointed to this excess liquidity that is now getting taken away and we sort of bought a lot of

Silly stuff in the past couple of years that doesn’t mean that investments into technology stocks are silly but maybe the valuations were and so now we’re seeing this regime change and uh also look at what what’s happening to cryptocurrencies a huge drop um in the past a couple of weeks and months the same is true to technology stock so that doesn’t mean that

Those stocks won’t be around anymore that doesn’t mean that crypto isn’t around anymore but we definitely see some a bigger correction and some of the bad apples probably uh will be gone in a couple of months okay thank you for that yens i want to look now towards europe turning to the eurozone specifically of course talking there about the 19 countries within

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The eu that share the euro currency so breaking this down again for a second we saw a similar upward trend in uh the eurozone as we saw in the u.s since last summer inflation up 8.1 percent in may compared to a year before of course again hitting food energy and consumer goods all of those rising significantly uh just even this last month um now this uptick

Surprised many economists and added to the pressure for countries to finally do something about this so veronica going to you now i mean we’re seeing high prices in europe as well can you break down for us how is the situation in europe different than the one in the us actually yeah in europe energy prices have increased a lot and this was the case before the

Aggression of russia against ukraine already but it was of course intensified uh due to the war um against ukraine um but we also see uh price increases for food and also for core inflation so by now uh we have also price inflation hikes that are quite high and this is also due to ongoing disruptions in the supply chain so it’s a supply driven inflation and the

Challenge is now to to somehow reduce demand which is of course um inducing price pressure if we um if we have a high rising demand after the corona crisis but supply cannot meet this demand of course this then takes effect in high prices and i think this is a challenge at the same time we have very low growth rates um to be expected so this is a very challenging

Situation all right well talking about the situation that we’re in right now i want to take a look back for a second of obviously we’re coming off of around a decade of historically low interest rates in some countries even negative rich interest rates now in the euro area the ecb in recent years had been quite adamant about sticking to its low rate policy but

There were many critics uh when it came to this idea can you tell us did this environment of low rates do what it was supposed to or what do you think the legacy of this era might be yeah i think the debates should not be so much about past monetary policy this is not what affected the current of inflation it’s rather the energy price inflation it’s the supply

Restrictions that we just um have due to the supply chain disruptions and i think um we have to see that at the moment uh monetary policy has to react in a very challenging situation uh already now interest expenditure um in relation to total expenditure is rising for example in france and it italy and fiscal dominance is increasingly under discussion um so

This is a challenging situation for monetary policy but it is clear that monetary policy now has to react in order to get inflation and in particular inflation expectations under control because if people expect that inflation will remain high then we would also have to expect second round effects and self-fulfilling prophecies and this of course should not

Happen of course yeah i mean i will admit that i think central bankers have a bit of sympathy for from me in any case uh there are so many moving parts here war in ukraine energy crunch pandemic and yeah they’re just doing what they can but i mean keeping with that point let’s talk about what options they really do or governments and central banks do have uh to

Respond to this inflation and of course increasing borrowing costs which is the case that we’re seeing now is one option this is has the point of lowering the amount of money that’s swimming around in the economy and this is exactly what um the u.s federal reserve has been doing the last few months other central banks as well but this week we saw the fed going

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For its largest single rate hike in almost 30 years this three quarters of a percentage point increase uh was the largest since 94 and higher than the half point hike that it had hinted at in recent weeks economist and investors anticipated a more aggressive response after this latest data out showing us consumer prices grew at their highest pace in 40 years

In may again with food gas and housing all surging and this is what fed chairman jerome powell said at his remarks we at the fed understand the hardship that high inflation is causing we’re strongly committed to bringing inflation back down and we’re moving expeditiously to do so we have both the tools we need and the resolve that it will take to restore price

Stability on behalf of american families and businesses all right yeah it’s obviously going back to you here now we’re seeing this higher than expected height is this a sign that the fed waited too long to raise rates chrissy to a certain degree i share your sympathy with those policy makers at the federal reserve or other central bank it’s not their fault that

For example we’re having the war um in the ukraine and definitely that is driving energy and food prices much higher but still there were some early warning signs already last spring and over the summer and fall for example when it comes to higher labor costs in the united states when it comes to oil prices that already started to increase at least by a summer

Of last year so i would say yes they are behind the curve they should have acted earlier and now it is a pretty bad timing because the economy starts to cool off at the same time we have sort of an historic pace when it comes to pumping up interest rates well of course it’s not just the u.s that’s been tight tightening its belt we know the european central bank

Announced it would lift rates this summer for the first time in 11 years the bank of england has also raised its key barring rate five times in recent months and we even heard from the swiss central bank surprising many by saying that it would have its first rate hike in 15 years as well so popping off of this this idea of european rate hikes veronica i want

To give this question to you now we know borrowing is going to be getting more expensive for countries as well as consumers how is this going to affect countries with high levels of debt relative to gdp thinking of course of italy greece we know that uh the the last hike we saw like this a bit over a decade ago we saw the eurozone debt crisis coming out of that

Um following that so what could happen this time yeah i think we see the markets reacting already so highly adapted countries are coming under greater pressure because doubts about their sustainability issues um of course reflect in interest rates levels and in order to get not to get into trouble systematically in the long run i think there’s no way around it

That states some states must get their debt under control now um in the medium term uh until around 2025 uh there’s still some time for um bringing forward structural reforms and for spending quickly the new generation eu funds with her which have been issued in the corona crisis in order to promote growth i think there will be new ecb instruments in order to

Get this practice under control but this can at most by some time i think it will be crucial to get uh the adapt uh situation under control in order not to get into trouble systematically uh if rates uh become higher how how high they will turn out to be so the market rates already increased but you never know how much anticipation of future interest rates

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Hikes by the central bank is already included in the today’s markets rates so we cannot know this but rates have increased substantially since last autumn already okay i want to come back to you in a minute veronica talk again about this idea of balancing debt with growth but hopping over to yens for a second uh to get a little bit of an american perspective

On something similar um i mean uh obviously in both markets we’re seeing quite a politically hot button issue here uh you know how things rising prices for people what this what this is going to do for economic growth i mean looking at the u.s the economy in some ways is quite strong there we know unemployment is very low but there’s still somehow an impression

That the situation with the economy has gotten out of control how do you think this is likely to play out politically in the u.s well not very good for the current administration we might be facing a recession maybe maybe not but we already do see signs that some parts of the economy start to be cooling we hear from some corporations for example that they’re

Not hiring people anymore we even hear about some layoffs so parts start to move here in the united states and if you look at the approval rating of joe biden it dropped pretty much like a rock and we have those important midterm elections in early november and i guess it will be very hard in this environment to keep the majority for the democrats the number

One topic here in the united states for americans it’s not the war in the ukraine it’s not the pandemic it is inflation and rising prices and people blame this on the current administration at least partly right i mean of course high prices are something that americans europeans people everywhere are dealing with every single day when they go to fill their gas

Tanks when they go to the grocery store so that makes a lot of sense of course now i’m hopping back to you veronica and what we were just speaking about you know we were talking about highly indebted countries within the eu but i’d like to with the euro area pardon me but i’d like to take a step out for a second and talk also about countries outside of this

Market thinking specifically about developing and emerging markets um now borrowing will also get more expensive for them what effect do you think that this could have on those markets yeah i think this will be also very challenging uh so um those countries uh typically are in a much more challenging challenging position and on also the um effects that we see

For example in food prices will be effective of course also in developing countries as well but it will not only be higher prices but it will also be hunger so there will be a crisis uh ongoing i think uh due to the high food prices due to the um restrictions in food supply that is also due to the war in ukraine um that will affect uh developing countries uh

Very much and i think this will be a big challenge for the international community well thank you so much for that analysis this is all of our business special saying goodbye to our low interest rate world i want to thank again veronica grimm of the german council of economic experts and yes corta our correspondent in new york for joining me today if you enjoyed

This please hit like and subscribe you can also check us out on some of our other channels we have dw news youtube as as well as the dw news website for me and the whole team here in berlin goodbye and until next time take care you

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Saying goodbye to our low interest rate reality | DW Business Special By DW News