Beginning of the end of the zero interest era

Inflation concerns could lead the Bank of England to raise interest rates on Thursday. The pressure is not only increasing on the island.

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The British central bank governor Andrew Bailey chose clear words: “We will have to act,” he recently said on a panel with reference to inflation, which in the UK could soon go up to five percent or even higher.

On Thursday, the Bank of England is likely to announce that it will raise its key interest rate by 0.15 to 0.25 percent. The movement is minimal, but it has considerable symbolic power.

It heralds the beginning of the end of the monetary policy emergency that began 14 years ago in the financial crisis and has been extended to this day by the euro crisis and the pandemic. Despite ongoing Brexit stress and a foreseeable economic slowdown, the Bank of England wants to turn the money lock to reach one percent by the end of 2023.

For millions of households that are just about to digest a steep increase in their gas and electricity bill, the interest rate scenario also means higher housing costs. There is a little less money left in the household budget for consumption, and one or the other company is likely to get into trouble. But real dramas look different.

Don’t worry too much about inflation

In England, where Brexit has led to an acute labor shortage in many sectors, the central bank is more concerned about the inflation trend than elsewhere, but in Great Britain too, the monetary authorities are still assuming that the current surge in inflation will soon flatten out. A really restrictive interest rate, which could cause serious pain for the country, should not be necessary, so the hope.

They are even more relaxed in the American Federal Reserve, which should first announce the so-called “tapering” on Wednesday, the throttling of the bond purchase program worth $ 120 billion per month. Fed Chairman Jerome Powell has long prepared the financial markets for this moment. At most, the justification creates tension. Although the inflation rate in the United States soared to over five percent in September, Powell does not use the word rate hike yet. But there are also bets on the US market that it will turn the interest rate screw earlier than 2023.

The decisive factor is not when the first rotation takes place, but how and in what cadence, writes Thomas Stucki from St. Galler Kantonalbank in his investment commentary. It would only become dangerous if inflation got out of control and the central banks had to raise their key interest rates sharply in a short period of time. A recession with a steep rise in unemployment would be the inevitable consequence of this. Only with a long delay would the Rosskur curb inflation.

The new stock market records are an indication of calm

The horror scenario is called “stagflation” in the language of economics and is currently making the rounds in the financial markets. But hardly anyone there thinks it is likely, as the ever new stock exchange records show. Not least, the central bankers themselves take care of this. But if they do not manage to dispel the inflationary specter with words, they will have to act willy-nilly. The pressure on the monetary authorities is increasing everywhere, not just on the British Isles.