ECB overdoing rate hikes is major risk, warns Allianz economist 

Holding interest rates too high for too long a threat to the global economy

The European Central Bank is poised to deliver another rate increase later this month.

The prospect that European Central Bank or US policymakers might overdo their increases in interest rates is now one of the most prominent threats to the global economy, according to Allianz chief economist Ludovic Subran.

Speaking to Bloomberg Television, he said his outlook for a so-called “soft landing” hinges on policymakers not going overboard in their drive to tame consumer prices.

“It depends vividly on central banks’ determination to kill inflation,” he said. 

One of the main risks to the economy is the risk of policy mistakes from central banks, and this toxic policy mix risk between fiscal and monetary tightening at the same time.”

Policymakers are still showing a concerted bias toward more interest-rate hikes, with both the US Federal Reserve and the ECB poised to deliver increases later this month. In Australia, officials kept borrowing costs unchanged on Tuesday, but held out the possibility of more action if needed.

For Mr Subran, a danger of error might materialise if central banks keep policy too tight for too long. He referenced a discussion among officials at the ECB’s annual retreat last week.

“What would happen if the ECB were to hold rates high on top of adding a couple more hikes for the full of ‘24 to see the full transmission?” he asked. 

'Policy mistake'

“This for me would qualify for a policy mistake because that would mean we would start seeing the real economy effect of this embedded tightening, so that would be already too late for the central bank to pivot,” he said. 

Memories of policy mistakes by the ECB still linger. Twice, in 2008 and 2011, officials began cycles to raise interest rates that were soon aborted.

Questioned on lingering risks to the financial system, Mr Subran said that “they haven’t disappeared”.

“I stand by my call to be very cautious with the liquidity situation” for at least a year, he said. 

“I still see a lot of leverage and a lot of concern about credit risk, and to be fair a lot of financial institutions also that need to continue to do the right testing. Remember, financial accidents could also come from exogenous shocks, think about climate risks.”