Bank of Portugal considers raising interest rates a "cold shower" for the economy.
In a post, the BdP explains how the European Central Bank (ECB) raised interest rates to curb price hikes and inflation. Understand in the following.
"Raising interest rates is like throwing a bucket of cold water on the economy"
The Bank of Portugal (BoP) believes that the goal of raising interest rates in response to rising prices was like throwing a "bucket of cold water" on the economy.
In response to the rise in prices, the BdP explains that the European Central Bank (ECB) increased interest rates in order to slow down inflation.
The inflation outbreak experienced in the post-pandemic period was met by the ECB with an increase in benchmark rates. Raising interest rates is like throwing a bucket of cold water on the economy, slowing down the rise in prices of goods and services we buy to bring inflation to the 2% target," read in a Banco de Portugal post shared on the social network X (formerly Twitter). (Source: https://www.noticiasaominuto.com/economia/2564972/balde-de-agua-fria-para-que-serviu-o-aumento-das-taxas-de-juro)
Note that, as a consequence of the increase in reference rates by the ECB, "commercial banks raise interest rates on their loans and deposits, discouraging and increasing the former and encouraging the latter," it also reads. This "tends to lead to less consumption and investment," and "cools down the economy."
"Throughout 2023, the ECB continued this cycle of increases, raising interest rates by 0.5 points at the meetings in February and March, and by 0.25 points in the meetings in May, June, July, and September," recalls the publication.
When will the first interest rate cut happen?
Luís de Guindos, vice-president of the ECB, pointed out in the European Parliament a cut for June, if the data continues to show improvement in inflation.
Despite the risks that may influence the evolution of prices, wages, productivity, unit labor costs, profit margins, and geopolitical risks, the ECB's projections suggest that the inflation rate will continue to decrease moderately, reaching 2% by 2025. This leads the vice president to believe that it will be possible to relax monetary policy restrictions in June.
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