‘Low interest rates in a high interest rate environment are extremely unattractive’

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‘Low interest rates in a high interest rate environment are extremely unattractive’

The European Central Bank has done well to announce an interest rate hike of 50 basis points, says Professor Arnoud Boot. At first there were doubts about this because of the financial instability that the collapse of Silicon Valley Bank and the noise surrounding Credit Suisse entailed.

The European Central Bank has done well to announce an interest rate hike of 50 basis points, says Professor Arnoud Boot. At first there were doubts about this because of the financial instability that the collapse of Silicon Valley Bank and the noise surrounding Credit Suisse entailed. (ZUMAPRESS.com)

Although he emphasizes that there were other choices, such as a smaller interest rate hike, Boot is happy that the ECB went ahead with it. “Otherwise they would have allowed themselves to be guided again by a hostage-taking of the financial system, and that would not have helped the credibility of monetary policy.”

He argues that the inflation problem is still there and that the credibility of monetary policy lies in the idea that inflation is always being fought. In addition, it must be realized that the interest has risen from 3 to 3.5 percent. “That percentage should not deter companies from making investments,” he says.

Boot therefore believes that monetary policy should not be thrown out the window immediately if something threatens to happen. ‘Especially given the amount of government support that is available if a relatively small bank in the United States collapses.’

Deregulation

But, says Boot, the situation is also partly different in Europe because there has been less deregulation. This happened in the United States under President Trump. ‘It was not for nothing that the collapse occurred at a relatively small bank,’ says Boot. (…). “Under Trump, there has been deregulation, especially at those smaller banks. That gave extra leeway.’

According to Boot, the bank has actually tried to use that room for maneuver to make a return in the period of low interest rates. Then the bank made the choice to invest in long bonds with low interest rates, and when interest rates went up, they stuck with it. “It means that low interest rates in a high interest rate environment is extremely unattractive, and bonds fell in value. That’s why they got into trouble.’


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