It’s a refrain we’ve heard for a long time: The era of rock bottom rates will soon end, and our economy, doped on this drug for years, will need to detox. If the Cassandres have been contradicted by the facts, they may finally be right. The wave of inflation that is spreading through the economy is not calming: in France, the price increase accelerated in April (+4.8%), according to figures published Friday morning by the Insee. In the eurozone, it rose to 7.5%. In the United States, it reached 8.5% last month. After a long delay, central banks are now ready to tighten the screw to stop the label roll. “We can expect an ultra-aggressive US central bank in the short term despite the deterioration in the macroeconomic environment,” said Christophe Barraud, chief economist at Market Securities. currently limited in the eurozone, but it cannot remain unmoved in the face of the double-digit inflation experienced by certain countries of the monetary union”.
A change of era that is beginning to materialize and spread through the economy. Mortgage rates are starting to rise in the wake of government bond yields: yields on French securities have thus reached 1.4%, their highest point since… 2014. Should we be worried? “No for now, because real interest rates, ie adjusted for inflation, are not going up,” explains Eric Dor, director of economic studies and professor at the IESEG School of Management, so it will all depend on the magnitude of the impending increase. ” This increase could indeed make many losers. “This is also the goal: the rise in the cost of credit serves to curb demand and thereby slow down the economy, which should break inflation”, deciphers Sylvain Bersinger, economist at asteres.
The first losers: the debtor countries, which will see their debt service become heavier over the years…. The interest burden, which had melted in recent years, could rise again as certain bonds index inflation. According to Fitch’s calculations, the bill could reach 11.5 billion this year. And much more if interest rates rise… “It would not be a problem if inflation were accompanied by strong economic growth, because the extra income would make it possible to finance this extra”, emphasizes Eric Golden. Which is not the case today: growth stagnated in the first quarter and with the war in Ukraine and the Chinese slowdown, the outlook for the coming months does not look good…
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The cold shower for the financial markets
Households and businesses also have a lot to lose: the rise in the cost of credit risk is putting pressure on them and holding back their consumption and investment. But not everyone will be in the same boat. “If their remuneration rises or if companies succeed in passing on these cost increases in prices, they can absorb an increase in interest,” says Eric Dor. Among the most vulnerable are households over-indebted to consumer credit, which have been forced to extend it, and companies operating in sectors weakened by the Covid crisis, the war in Ukraine, or companies that have less room to manoeuvre. to set prices. “And for small and medium-sized enterprises that are structurally short on capital,” recalls Denis Le Bossé, chairman of the collection agency Arc. With a ripple effect on the household side: a risk of deterioration in the labor market…
And if there’s one sector that fears the risk of interest rate hikes, it’s the real estate sector. “No panic for now: we have gone from an extremely favorable situation to an only favorable situation with 20-year yields fluctuating on average between 1.37 and 1.41%, and as long as we stay below 2% there is no risk of a market decline”, puts Stéphane Van Huffel, co-founder of Netinvestment, a real estate investment consultancy, into perspective. Borrowers are certainly more cautious and banks are starting to get more demanding after they have distributed mortgages everywhere, but the phase is more like a return to normal than a hard landing where buyers would be left in the lurch. As for the banks, a bit squeezed by the low interest rate era, the rise in the cost of money could be good news… but not right away! “They borrow short term to borrow long term, so initially their situation worsens before they improve,” Eric Dor sums up.
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Finally, however, it is a cold shower for the stock markets. “Between the rise in interest rates and the high risk of lower earnings, we are already seeing major corrections in equity markets and should remain so,” predicts Eric Dor. And the many bubbles that have swollen during the long years of easy money are about to burst at any moment. But the most disturbing cloud is that of systemic risk, of a default that would in turn plunge the actors of the financial world, and then those of the real economy, into the grip of a crisis. “The financial system is always full of risky loans: the slightest rate hike increases the risk of default,” Eric Dor underlines. Curbing inflation without flipping the economy: the mission of central bankers is more delicate than ever.
The L’Express think tank