The European Central Bank raised interest rates to a record high last week, and the Bank of England is expected to raise rates to 5.5%, the highest since 2008.
Will this slow down the already struggling economies of Europe and the UK even more, and what are the dangers?
Crushing economic growth, and not stagflation, is “the real danger” and should now be the focus of the European Central Bank and the Bank of England, warns a leading independent financial advisory and fintech organisation.
Raising interest rates could potentially force these already struggling economies to slow down even more. At the same time, some economists feel that continually increasing interest rates are the only way to ward off stagflation (when high inflation and stagnant growth occur simultaneously).
Nigel Green, deVere CEO, disagrees. “While neither extreme is ideal, hindering longer-term economic growth is the real danger, not short-term stagflation, and it should be the focus for policymakers. Crushing already slowing economic growth through the blunt instrument of monetary policy will be more detrimental to an economy than short-term stagnation.”
Stifling economic growth caused by high interest rates could potentially cause reduced entrepreneurial activity and innovation and, in turn, reduced economic development leading to fewer jobs.
In times of economic instability, ensuring that your investment portfolio remains diversified is recommended to spread the risk of potential losses.