Rate hike in the US: what it means for consumers and businesses in Germany

Created: 05/05/2022, 20:03

By: Thomas Schmidtutz

Construction site of an apartment building: The US central bank is tightening the interest rate screw again.

The consequences will also be felt in Germany.

© Julian Stratenschulte/dpa

The US Federal Reserve wants to get the high inflation under control with strong interest rate hikes.

This also has consequences for the German economy.

What companies and consumers have to adapt to.

What happened?

The US Federal Reserve has raised interest rates to between 0.75 and 1.0 percent.

It was the second rate hike this year, at 0.5 percentage points it was twice as large as usual.

Central bankers are usually very reluctant to make clear statements because every word they say has consequences on the financial markets.

This time, however, Fed Chairman Jerome Powell addressed the Americans directly and assured them that the Fed would fight high inflation with determination.

Experts therefore expect further large interest rate hikes for June and July.

"This is just the beginning," believes Friedrich Heinemann from the Center for European Economic Research.

Why are US interest rates important for Germany?

The Fed is the most important central bank in the world.

If it raises interest rates, other countries often follow suit.

This is also putting pressure on the European Central Bank (ECB), which has so far left the key interest rate at zero percent in order to get the economy through the Corona crisis.

But the US and Europe have the same problem: Inflation is far too high at over seven and eight percent, respectively, and monetary authorities are aiming for inflation rates of two percent.

More and more ECB members therefore want to move away from the zero interest rate.

Many economists are asking for the same thing.

"The ECB should follow the example of the Americans," says Jörg Krämer from Commerzbank, low interest rates and bond purchases are no longer up to date.

Without a change of course, the ECB risks high inflation becoming permanent.

What do higher interest rates mean for loans?

The conditions for loans are based on the key interest rate.

The lower the key interest rate, the easier it is for countries to borrow, for example.

Critics therefore accuse the ECB of lowering interest rates in order to enable highly indebted countries like Italy to obtain cheap loans.

If the ECB raises interest rates, refinancing will become more expensive for such countries, including Germany, of course.

The financial markets are already anticipating this: Today, investors get a return of around one percent if they lend money to Germany for ten years.

A year ago they paid to park money in German government bonds.

The difference sounds small, but for states it accounts for many billions per year in interest payments.

Will the turnaround in interest rates stifle the economy?

What applies to states also applies to consumers.

In the future, you will no longer get such cheap loans, whether for mobile phones, cars or real estate.

You can already see that from the building interest rates, which are about three times as high today as they were a year ago.

If interest rates rise now, loans will become more expensive.

This slows down consumption, some people simply can no longer afford a new mobile phone, house or car.

Companies are therefore threatened with worse business.

And they too can no longer get money for machines, factories or other investments so cheaply.

This puts the central banks in a dilemma: they have to fight high inflation, but they must not stall the economy.

Will that work?

Even financial professionals are skeptical.

Fighting inflation is a "tightrope walk," according to the British fund company M&G.

Are the Fed and ECB now triggering a stock market crash?

Continued high inflation despite high interest rates, an economic crisis triggered by a lack of materials and a lot of uncertainty because of the war in Ukraine: This is the horror scenario that crash prophets are currently painting on the wall.

It's not completely far-fetched, especially since rising interest rates are making safe bonds a little more attractive again compared to risky stocks.

Even many large investors fear that after very good years on the stock market, leaner times will follow for Dax, Dow Jones & Co.

The German investment boutique Vates even fears a cycle of "boom and bust", i.e. a succession of short stock market booms and hard crashes.

But like all stock market forecasts, this one should be treated with great caution.

After the Fed meeting, investors remained relaxed and stock prices even rose.

Can central banks curb inflation?

That's the big question.

In addition to the interest rate cycle, there are other factors that are currently affecting prices.

The war in Ukraine is making raw materials and energy scarce and very expensive, and corona lockdowns and a lack of computer chips are still causing supply chains to break down.

"The drivers of inflation are global, not European," Italy's ECB Executive Board member Fabio Panetta said in an interview.

He therefore believes that this time monetary policy has only limited room to bring inflation under control.