“The rate hike will not take place”

Lhe rate hike never really started. It’s already finished. To say this may seem paradoxical when interest rates have indeed risen spectacularly since the abandonment of the zero interest rate policy maintained for years: ten-year American rates have thus increased from 0.1%. to 4.3% in four years, even reaching peaks of 5% in October 2023. At the same time, French ten-year interest rates rose from -0.5% to 2.9%, and other European rates followed roughly the same path.

However, these are only correct levels according to the standard rules proposed by economic theory. And it seems like that’s the most we can ask of them.

This increase indeed seems very “disappointing” compared to the trailer of the announced disaster scenarios: the post-Covid-19 surge in the prices of goods and services was to give rise to a confiscatory monetary policy, and not to inflation. transient. Fiscal policy was going to be strangled by a cost of debt that had become prohibitive. Investors, convinced of the authorities’ inability to control inflation, were going to demand staggering rates of return.

Overrated scenarios

Economists, on the basis of “Taylor rule” – stated by the American economist John Taylor in 1993 – and its variants proposed by academic research, explained that if inflation or gross domestic product (GDP) are higher than target or potential levels, we can determine a rate which is itself higher than a neutral rate in order to bring inflation and GDP in good shape. For all these reasons, interest rates had to rise more than necessary.

Read also | Article reserved for our subscribers The European Central Bank considers a rate cut premature

Today we know that all these risk scenarios were overrated. Central banks have never raised their key rates to levels that could be described as restrictive. And, in almost all cases, they set them at levels lower than those required by standard rules. Bond investors, for their part, have never demanded a particular premium to hedge against a possible drift in inflation, debt or key rates.

Certainly, there have been upwardly revised expectations, but nothing that betrays any fear in the markets. The cries of inflation should have caused this premium to jump well beyond zero. However, it has remained negative throughout the last decade (see the work of the Bank for International Settlements) and still struggles to become positive.

You have 58.1% of this article left to read. The rest is reserved for subscribers.

source site-30