Today we are going to talk about interest rates, after the decision of the Fed, the American central bank, to increase its rates precisely this week by 0.5%. This is the largest increase in 22 years.
franceinfo: Concretely, what does this decision mean and what impact can it have?
Raphael Ebenstein: This is a traditional way – used moreover by the central banks of various countries – to try to contain inflation, when it appears too high or uncontrollable. However, it reached 8.5% on an annual basis in the United States in March, much more than in France where it is close to 5%.
The logical and immediate consequence of an increase in interest rates is that borrowing money costs the borrower more money. In this case to commercial banks which provide liquidity from the central bank. They then “buy” the money produced by the central bank at a higher price. And this then has cascading effects, since they obviously pass on, in the end, this additional cost to their customers on the credit rates which increase mechanically. With the risk of suddenly slowing down business investment since investment is generally based on credit and borrowing, and therefore of weakening economic growth.
On the other hand, for savers who have put money aside, a rise in interest rates means at the same time a higher return on their savings.
Has the rise in interest rates in the United States already had effects in France?
Not directly or not immediately, sknowing that the European Central Bank did not raise its rates, unlike the American Fed. However, this seems inevitable in the long term, given the inflation caused by the war in Ukraine, among other things. And all investors anticipate it.
For now, what is already measurable is the rise in bond rates, what used to be called Treasury bonds, loans issued by States on international markets to finance themselves. There, the Fed’s decisions have a visible impact that goes far beyond the framework of the United States alone.
Example: a few months ago, France borrowed at 10 years at zero interest rate, or even at negative interest rate, that is to say that it had to repay less than what it had borrowed. Today, the rate has already risen to 1.5%. This will therefore be felt sooner or later by a domino effect on the mortgages that households will take out. Specialist players in the sector such as Best Rate also estimate that some 20-year loans to buy a house are already at a rate above 1.5% with prospects for a continuous rise in the coming months.
Admittedly, we are still at very low rates in absolute terms, well below what they were in the 1990s or 2000s, but the trend reversal seems in any case undeniable and above all, no one can say today. today how far, or how long, it will last.