Many people wait impatiently for central banks to introduce interest rate hikes. However, the Fed plans to do two hikes in quick succession in the US, as unrealistic as that may seem. Moreover, the European Central Bank’s plans seem somewhat improbable, per the Irish central bank chief.
European Central Bank Plans Seem Too Optimistic
Growing inflation, COVID-19 uncertainty, and a steep distrust for financial institutions make life difficult for central banks. Moreover, the negative or low-interest rates do not incentivize people to put money in a savings account. Paying money to let someone else hold funds on your behalf is a backward solution. Unfortunately, it may take a while to resolve the interest rate issue.
More specifically, both the Fed and ECB claim to hike interest rates this year. It is an [overly] ambitious plan, as there is no way to do it safely or without triggering even worse long-term effects. Irish central bank chief Gabriel Makhlouf recently stated how a hike in Europe is “unrealistic”. Moreover, there is a key difference between what the market expects and how these plans will unfold in the real world.
The first step is for the European Central Bank to halt its bond-buying program. That seems like a foregone conclusion, as it is impossible to keep up. However, the pace at which this happens remains unclear. Harming the EU’s financial recovery remains a likely outcome unless the ECB takes proper countermeasures. A slow and steady approach seems to be more favorable.
One trade-off to consider is the wages rise vs. living costs debate. If one rises faster than the other, the interest rate hike becomes impossible to pull off. As such, it is crucial to adjust one’s expectations where the European Central Bank is concerned. Additionally, all markets will remain uneasy until action is taken by the ECB, even if no one knows when that will be exactly.