As expected, the US Fed, the system of central banks, has raised interest rates by half a percent in one fell swoop. The main interest rate is now 0.75 to 1 percent, depending on the economic region.
It is the second interest rate hike this year, in March the interest rate rose by 0.25 percent. The Fed wants to curb inflation with this new step.
An increase of half a percent is a serious step, the most aggressive since the year 2000. The measure is mainly prompted by the ever-rising inflation, the highest in forty years. In addition, various interest rate steps will follow in the coming months. In the press conference, bank president Jerome Powell said: “Inflation is way too high right now. We see this is causing pain and we are doing everything we can to reduce inflation.”
An interest rate increase is usually a means to slow down and suppress price increases. A high interest rate makes borrowing more expensive and puts a brake on the expenditure of people and companies, so that demand decreases and prices fall, or so the reasoning. The problem, however, is that higher interest rates do not help much against the high energy prices, the scarcity of goods and raw materials and the war in Ukraine.
The Fed also announced that it is beginning to phase out the huge mountain of purchased government and mortgage loans worth a total of $9 trillion. This will further increase borrowing costs across the economy.
ECB
As in Europe, inflation in the US has been skyrocketing for months. In March, the price increase was 8.5 percent, the highest in 40 years. In the Netherlands, the currency depreciation in April amounted to 11.2 percent. Money depreciation, because higher prices make your money worth less.
As in the Netherlands, it is mainly energy prices that are driving up inflation in the US, but higher wages also play a major role. The wage increases are the result of the enormous tightness in the American labor market. According to DNB president Klaas Knot, this wage-price spiral does not yet play a significant role in the inflation figures in the Netherlands.
The interest rate in the euro countries is still unchanged, the main interest rate is minus half a percent. The ECB is preparing to raise interest rates, but first wants to complete the debt-buying program, which is not until July. A first rate hike will probably follow in July or August.
Import inflation
An increase in US interest rates usually strengthens the dollar as well. In anticipation of the rate hike, the euro has weakened in recent weeks; with a rate of 1.054 dollars, the currency is at its lowest level since 2016. A weak euro is good for European exports, but bad for inflation. Because goods from abroad or that have to be paid in dollars further fuel inflation.
A higher interest rate means that borrowing money becomes more expensive, whether it is for a mortgage or for loans and investments. It also drives up interest rates on government bonds. On the stock market, an interest rate hike is seen as a threat to stock prices, because the bond markets are recovering. Growth companies that borrow a lot of money and still make little profit are also affected by the higher interest rates.
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