The Era of Expensive Money

Central banks around the world are beginning to gradually implement a tapering policy in which they reduce their purchases on bonds by effectively reducing the liquidity cannula in economies. This is due to the gradual improvement of economic indicators and the rapid rise in inflation.

Τhe FED, the Bank of England, the Norges Bank and other central banks such as Australia and Sweden have shown signs that they will raise interest rates. The cost of government borrowing will cease to be very cheap through bond issues, while the bubble in real estate markets will be restrained, which due to the low cost of money to date, property prices have skyrocketed.

It is certain that the ECB will follow the same path. So far, the tapering policy applied by the ECB has not really changed anything in recent years, because while it has reduced in absolute terms the volume of its purchases in bonds in practice, the volume of its purchases in government bonds remains unchanged. However, its purchases in corporate bonds have been blocked, with the result that its total volume of purchases in bonds seems to be reduced.

Higher US dollar interest rates relative to much lower euro interest rates are expected to cause market distortions. That is why at some point the ECB will be forced to raise its interest rates.

Norges Bank, in addition to the recent increase in interest rates from 0% to 0.25%, intends to make four more increases by the end of 2022, bringing its interest rates to 1.25% due to rising inflation and the withdrawal of support measures in its economy to deal with the pandemic.

The central banks of the Czech Republic, Iceland and South Korea have recently raised interest rates, following the example of the central banks of Brazil, Hungary, Paraguay and Pakistan.

The FED intends to make a total of three interest rate hikes by 2023, having begun to reduce the volume of its bond purchases, ie by applying monetary tapering policy, from November 2021 with a concomitant interest rate hike.

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