By Juan Cerruti*
Economists sometimes use complex words to describe much simpler phenomena. Trade-off could be a good example of this. A trace-off is nothing more than a dilemma. Or, said more colloquially, a “short sheet”: if I want more than something, I have to be willing to give up somewhere else.
The traditional dilemma between growth and inflation is usually the case of the typical Trade-Off in Economics. If you want to lower inflation, you may have to sacrifice some economic growth. The way to manage this delicate growth-inflation balance is usually through the interest rate, which regulates the central banks.
Precisely for this reason, when as a consequence of the pandemic, first, and the war in Ukraine, then, the world began to see in amazement how the highest inflation levels in 40 years were achieved in most regions, the central banks launched massively to rise interest rates.
Thus, in just over 15 months, the Federal Reserve (the American Central Bank) rose the types of 0.25% to 5.25%, and the European Central Bank did it from 0% to 4.25%. In fact, 2023 marked a record: it was the year in which a greater proportion of central banks around the world rose interest rates (8 out of 10).
The global types of types managed to return inflation to acceptable levels. The price increase, which reached between 8% and 10% annual levels in many countries during 2022, today is already aimed at 2% objective in countries such as the United States or in the Eurozone.
Although perhaps the most curious of this period of monetary hardening was that inflation was reduced without significantly affecting growth or verifying a great increase in unemployment. To this we called “soft landing” In 6 out of 10 cycles, the rise in types has generated some recession in different regions of the world. Achieving the proper dose of contractive monetary policy (type rise) without affecting the activity level is not usually a simple task.
What has been the reason for resilience in global economic growth? There is no simple response, and the causes are multiple. They range from the restoration of normality in global value chains after pandemic and war, to the folded effects of fiscal impulses that governments granted in the pandemic, among others. But one aspect stands out: the resilience of labor markets and upward resistance in the unemployment rate in most economies. For example, and despite the cycle of types of types, 2 out of every 3 economies in which Santander operates today is at the level of full employment or close to it.
Low types, but not so much
In a context in which economic growth is sustained and inflation gradually returns to the objectives, the central banks have started in recent months the type cutting cycle. The speed of the same varies by region, depending on the robustness of economic growth and the resistance of downward inflation. But the address is clear.
Anyway, the process will not be linear globally. There will be moments of pause in the cuts, including need to go back temporarily in some countries (as in Brazil and others) to ensure the descent of inflation. The arrival of Donald Trump to the presidency of the United States also raises doubts about the rate of type cuts, given that some of the policies that could apply have an inflationary bias (rise in tariffs to foreign trade, fiscal expansion, restrictions on migration, etc).
But in the medium and long term a world of lower types will mean greater impulse to growth. And in particular greater access to credit and higher incentives for investment. This aspect is key, even more when the world faces in the coming years the challenges that will require a huge amount of financing. One of them is the green, crucial transition to everyone’s future. To achieve the taxes of climate change taxes, it is estimated that until 2050 it will be required to invest approximately 275 billion dollars in physical assets.
What is clear is that, although the direction marked by the central banks with interest rates is down, its point of arrival will not be like the ultra low levels that we have seen prior to the pandemic (in the Eurozone they became even negative).
There is some consensus among economists in which the so -called “neutral interest type”, that is, the long -term equilibrium interest rate (which cannot be explicitly observed in any market but is theoretically estimated through different methods), has risen as a result of the conjunction of factors ranging from demographic changes (aging of the population and pressure on the pension systems) until the highest productivity Generative artificial intelligence, through the greatest geopolitical fragmentation and the commented need for greater investments to deal with climate change.
After all, it is important to remember that the world requires adequate interest rates for financial systems and markets to fulfill their function of effectively channeling savings towards investment, which is the key to sustainable medium and long term growth.
About the author:
*Juan Cerruti is a global chief economist of Grupo Santander
The opinions expressed are only the responsibility of their authors and are completely independent of the position and the editorial line of Forbes Mexico.
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