High interest rates to stay for now

 In Bonds and Gilts, Interest rates, Monetary Policy, News

A Portuguese economist who ran the country’s treasury and debt management agency IGCP, has warned that despite forecasts that interest rates will stabilise at between 2% and 3%, high interest rates will continue for some time.

The European Central Bank has made eight consecutive interest rate hikes taking rates to a maximum not seen since 2001, with the market expecting two further interest rate increases by the end of the year.
The impact of the ECB’s shock tactics on monetary policy has been painful for mortgage holders and company borrowers, but in an ECO interview with economist Cristina Casalinho as the annual European Central Bank Forum got underway yesterday in Sintra, Cristina Casalinho revealed that the national economy is beginning to show signals that the ECB’s monetary policy is “having an effect”.
This can be seen with a slowdown in the inflation rate which has gone from 10.14% in October to 3.98% now.
However, Cristina Casalinho has warned that it is too early to celebrate the end of the cycle of interest rate hikes.
“We are probably still in the overshooting phase” said the economist who currently heads the Sustainability Department at bank BPI after almost eight years running the Agência de Gestão da Tesouraria e Dívida Pública (IGCP).
The economist said that interest rates would hover at between 2% and 3% in the foreseeable future and said she was not overly worried about managing Portugal’s debt as the ECB begins its process of offloading member-state debt from July, despite recognising that “we continue to have a high stock of debt”.
The economist said that a return to negative interest rates was unlikely as it was an anomaly to the usual pattern seen over decades.
Considering that 50% of Portugal’s debt (represented in treasury notes) is in the hands of the ECB – one of the highest ratios in the EU – Cristina Casalinho said she was not overly worried because there are two phenomena that will partially offset this concern.
“If on the one hand the ECB deleverages and reduces its exposure to sovereign debts, at the same time Portuguese debt, in terms of percentage of GDP, is going down with a primary surplus expected, which in turn will lead to less of a need to issue bonds and this is positive”, she said.
Recently the Bank of Portugal published forecasts for the first time on the evolution of the debt ratio which by 2025 is expected fall below 100% of GDP.
Moreover, she said the ratings agencies were making more positive evaluations on Portugal’s ability to meet its debt obligations.