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An inconvenient truth for central banks

09 October 2023 ... min read

Carsten’s view on the dangers of high interest rates

Interest rates are always in the news, and the European Central Bank and the US Federal Reserve are among those who’ve been raising their key rates for over a year. But that’s not the whole story. The longer-term interest rates, or yields, on government bonds – those which mature after 10 years or more - are less talked about but perhaps are more important. And it’s why they’re the focus of our latest ING Monthly update

Carsten Brzeski

The German 10-year yield is approaching a 12-year high. Something similar is happening in the US. That means governments have to pay more to service that debt. There are many reasons for these rises: oil prices are sharply higher, and inflation is still a real worry. Another reason is that investors don’t think interest rates are going to come down anytime soon. Neither do we right now.

On the face of it, higher interest rates are good news for the profits of banks like ours, but the increase in longer-term interest rates has the potential to push both the US and the eurozone economies into recession. And financial markets have, more or less, made up their minds that these rates are going to stay where they are for quite some time.

And all that is the ‘inconvenient truth’ for central banks like the ECB. They may still maintain that more rate rises are needed to help fight inflation. But the longer rates stay high, the more dangers they pose to our economies. It’s the reason why we think they’ll actually start cutting rates again next year because the global longer-term growth prospects aren’t looking that great.

This inconvenient truth frames our latest ING Monthly. You can read all the analysis from Research’s global team of economists and strategists here

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