The end of the free money era

Attention, the changing economic era. Within a few months, with high inflation returning, interest rates began to rise sharply. Gone are the days of free or negative money when “needed” didn’t cost much. To borrow now, you have to pay interest.

In December 2021, the French interest rate on ten-year bonds was still zero. Today it is 1.5%. This is the highest since 2014. In the country of asylum in Germany, it reached 1% for the first time in eight years on Tuesday, 3 May, up from 0.3% six months earlier. The day before, the US ten-year rate had exceeded 3% for the first time since 2018, doubling in six months.

If these levels remain low over average, the change is historic: since the 1980s, inflation control rates have been steadily declining. In 1990, the French government borrowed 10%; 5% in 2000; Up to 2% in 2010; and at a slightly negative rate in 2021.

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Today the trend has changed. “After thirty years of a temporary decline in interest rates and fifteen years of unconventional central bank intervention, we are entering a new regime.”says Frederick Ducroz√©, Pictet Wealth Management Strategist, Swiss Asset Manager.

This coup occurs when debt has never been so high. During the pandemic, countries, but also businesses – and to a lesser extent households – used credit. In the euro area, the total debt (countries, companies, households) in the fourth quarter of 2021 reached 400% of the gross domestic product (GDP), which is nineteen points more than before Covid-19, according to UBS data. In these circumstances, the slightest movement in interest rates is very sensitive.

This change in trend is not always negative. The eurozone has been fighting deflation for years, and getting out of this trap is welcome. Raising rates for depositors is also good news. In addition, real interest rates (adjusted for inflation) remain very low, which reduces the debt burden. Finally, countries and companies have room for maneuver, which has refinanced themselves at very good prices in recent years. However, a paradigm shift is essential for governments, businesses, consumers and financial markets.

Great global monetary tightness

Major central banks promise to be restless this week. On Wednesday, May 4, the US Federal Reserve (FED) will raise the base rate for the second time in two months. The only question is whether this will be a quarter-point or half-point increase. The Fed’s rate, which was zero at the beginning of the year, could reach 0.75% and should exceed 2% by the end of the year.

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Georgie Collins

"Falls down a lot. Writer. Passionate alcohol maven. Future teen idol. Hardcore music practitioner. Food fanatic. Devoted travel fan."

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