why cutting rates can hurt households

why cutting rates can hurt households

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A strange phenomenon has manifested itself in the economy of the United Kingdom, and, secondarily, Europe. Rising interest rates have raised household incomes and The cuts could even hurt them. This situation, which may seem like a paradox, is one of the keys to what has been one of the great mysteries that have plagued the markets. Why have interest rate increases not generated a resounding blow to the economy?

For his part, Yacine Rouimi, economist at S&P Global, pointed out that the net income of European households is “the only positive side of the rate increase, since it is expected to generate an increase of 0.9% of GDP in net income for interest.” In any case, they point out that this generates dangers since “income may be lost indirectly through worse jobs and economic activity.” In addition, indebted countries could “generate greater pressure through taxes and households losing part of the extra income they receive.”

However, the main difference with the United Kingdom is due to the fact that, although in both cases there is a large amount of savings, in the case of the EU, it has attenuated income more because “they have had a higher remuneration”. Low and have been reactive regarding interest rates In addition, he points out that the figures “hide a marked difference between the different EU countries.” In this sense, the case of Holland stands out, where households are down 2% compared to, for example, Italy, where It is in a neutral zone.

In Spain, as Krustev explains, “since the global financial crisis there has been generating a reduction in debt“. However, the problem has come from “a high proportion of variable rate mortgages (63.9% of the total)” which has caused the debt to grow with interest rates. At the same time, the profitability of deposits has decreased. has fallen behind Europe by 2.31% compared to 3.03%. This would explain that, according to Caixabank Research, net interest payments have amounted to 3,700 million euros in the last recorded quarter (third of 2023) compared to 1,200 million in 2022.

In any case, Javier García Arenas, an analyst at the Spanish bank, points out that “the increase that has occurred in interest payments will begin to reverse” throughout 2024. Furthermore, the expert points out that the disposable income of households has increased significantly (10.6% year-on-year) thanks to a powerful growth in salaries (9%) due to the strength of its labor market. “This offset the higher interest.”

The ‘normality’ of the US

In the US, the high indebtedness of its population has led to a trend more in line with history, causing the powerful cycle undertaken by the Federal Reserve to completely shake its income. In fact, what Americans pay for credit cards, mortgages and all types of debt is has increased by 420,000 million of dollars since the frenetic rate hike began while the increase in its interest income was only 280 billion.

Regarding the reasons why the American case has been different than the English or many European countries, it clearly stands out that what they paid for their mortgages and loans advanced much faster because the US population has resorted massively to loans. non-mortgage loans such as consumer loans, where interest rates are updated much more immediately and entail higher bills. According to data from the Federal Reserve, US non-mortgage debts do not have stopped growing to 4.9 billion of dollars. In fact, non-mortgage loans in the US accounted for close to 35% of the total in 2023.

In Europe, for its part, household debt hardly represented anyn 54.8% of GDP compared to 64% in the US, which gives them a little more margin so that their income from savings remuneration exceeds what they pay for their debts. Furthermore, in the US there have been complaints that their entities have not transferred interest rates to deposits as quickly as rates were rising, leaving families at a disadvantage.

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