Are interest rates rising too quickly?

[EvotingMachine0197]

Somewhat like the beachball on the sealions nose, I see the economy as being inherently unstable. Too much movement too quickly and the ball is dropped.

Like any mechanical or electronic system, the economy has a given response time to any stimulus, in this case interest rate hikes. If this stimulus is over applied, the economy will not necessarily react any faster, but will eventually catch up and overshoot the point of balance. One effect of this overshooting, I suspect, will be an over-suppression
of consumer spending - not good either.

A 50% increase in one year just seems too fast to me. As an engineer, not an economist, I cannot back this up with anything - it's just an opinion and there's a good chance it's rubbish.

[hiding behind a poster]

You're probably right. Interest rate rises normally take 6-9 months to feed through to consumption and investment decisions. So in an Irish context, the recent slowing in house price growth may be in part down to the start of the rate rises late last year. In a European context, they've now increased rates 4 times, with very little time to assess the effect of the early rises. And if oil stabilises after September, even if at a price of $70-75, then a large part of the energy component of EU-wide inflation will be stripped out, as it first hit $70 in September last year. So EU growth could slow right down, leading to rate falls from about the middle of next year.

[Ponzi]

3% interest rates are low by historic standards. The money markets aren't don't seem to be anticipating a reduction in Euro rates anytime soon. Money supply and inflation are still well above target and the ECB may be targeting the tightening policy at the ClubMed nations which have lost the run of themselves entirely.

[qtman]

A 50% increase in one year just seems too fast to me. As an engineer, not an economist, I cannot back this up with anything - it's just an opinion and there's a good chance it's rubbish.

Interest rates and mechanics aren't really comparable. You have to remember that the ECB rate is set in anticipation of economic activity rather than in reaction to it. The ECB is of the view that economic activity will increase in 2007, so the rate hikes are a pre-emptive strike in anticipation of inflationary pressure. They have not been raised with reference to current economic activity.

[factual]

3% interest rates are low by historic standards. The money markets aren't don't seem to be anticipating a reduction in Euro rates anytime soon. Money supply and inflation are still well above target and the ECB may be targeting the tightening policy at the ClubMed nations which have lost the run of themselves entirely.

Ireland's households have a historically high level of debt however, so interest rate increases will take a lot of spending out of the household sector. Possibly no bad thing as it will slow down the economy, although as usual the poor will be worst hit

[Ponzi]

3% interest rates are low by historic standards. The money markets aren't don't seem to be anticipating a reduction in Euro rates anytime soon. Money supply and inflation are still well above target and the ECB may be targeting the tightening policy at the ClubMed nations which have lost the run of themselves entirely.

Ireland's households have a historically high level of debt however, so interest rate increases will take a lot of spending out of the household sector. Possibly no bad thing as it will slow down the economy, although as usual the poor will be worst hit

I would expect a contraction in spending and private sector credit growth (running at 30% at present). Debt must be repaid at some stage, form future income.


It looks like Tony Blair is having a particulary bad week,
http://news.bbc.co.uk/1/hi/business/5244202.stm

[kerrynorth]

Any significant increase in interest rates are going to disproportionately impact upon the grossly imbalanced Irish economy. A rise from 2 to probably 3.5% in a year and to probably 4%+ next year will along with the inflationalary pressures in the energy sector will have a twin effect on the economy. In the short term these effects will be ameliorated by the SSIA affect, however, come the latter half of next year I can see consumer spending coming severe pressure. Also, I will guarantee you that there will be a raft of job losses in the already under pressure manufacturing sector, particularly in the endogenous sector, although FDI in both the manufacturing and services sector may also see siginifcant losses if there is added substantial drop in the US $. I would also see the construction sector starting to slow down sharply next year. I would anticipate an unemployment rate of 5.5 to 6% by the end of 2007 compared to 4.4% at present.

[morryah]

Possibly no bad thing as it will slow down the economy, although as usual the poor will be worst hit

On the plus side though, rich people will be ok.

[EvotingMachine0197]

Any significant increase in interest rates are going to disproportionately impact upon the grossly imbalanced Irish economy. A rise from 2 to probably 3.5% in a year and to probably 4%+ next year will along with the inflationalary pressures in the energy sector will have a twin effect on the economy. In the short term these effects will be ameliorated by the SSIA affect, however, come the latter half of next year I can see consumer spending coming severe pressure. Also, I will guarantee you that there will be a raft of job losses in the already under pressure manufacturing sector, particularly in the endogenous sector, although FDI in both the manufacturing and services sector may also see siginifcant losses if there is added substantial drop in the US $. I would also see the construction sector starting to slow down sharply next year. I would anticipate an unemployment rate of 5.5 to 6% by the end of 2007 compared to 4.4% at present.

Couldn't agree more. The SSIAs coupled with Titanic-esque confidence are providing an anaesthetic to the pain of these rises. This will wear off. Then trouble. As well as job losses, speculative properties will begin to get dumped.

Ponzi, do you know what caused the German dip and French peak in graph above. Just curious.

[newFF]

3% interest rates are low by historic standards. The money markets aren't don't seem to be anticipating a reduction in Euro rates anytime soon. Money supply and inflation are still well above target and the ECB may be targeting the tightening policy at the ClubMed nations which have lost the run of themselves entirely.

Ireland's households have a historically high level of debt however, so interest rate increases will take a lot of spending out of the household sector. Possibly no bad thing as it will slow down the economy, although as usual the poor will be worst hit

If the "poor" have debt they will be hit hard. Many in this category are already paying exhorbitant rates to the hire purchase sector. - Typically interest rates from these institutions are of the order of 23%.